[sagnik2422]

Olympia Company’s variable expenses are 60% of sales. At a $600,000 sales level, the degree of operating leverage is
4. The company's chief executive officer has decided to purchase and install a new automated assembly line that will
increase the company's fixed expenses by 80% but will reduce variable expenses per unit of product by 40%.
Assuming that the sales level remains the same and the change will not affect the sales price, determine the new
degree of operating leverage after the new assembly is installed:

My work : First, I am confused because they are saying per unit but never give unit sales, nonetheless I did DOL = CM/NOI and got NOI = 60,000 but after calculations got DOL of 3.45 which does not match the answer of 6.40

Please show help with steps,

Thanks

[paraclete]

Operating leverage is the ratio of fixed cost to variable cost

variable costs = 600000*.6 = 360000 fixed costs = 360000/4 = 90000 profit 150000

the new arrangement

fixed costs 90000*1.8 = 162,000 variable costs 3600000*.6 = 216,000 profit 222,000

the leverage becomes 216000/162000 = 1.333

This is as much an exercise in logic as it mathematics

DOL = %change in EBIT over the %change in sales. One part of that equation is a 0. What happens when you divide by zero? Whatever is on top line becomes the answer. Do you have sufficient information to determine EBIT? Movement in profit 222000/150000 =1.48 However that number includes fixed costs and we don't know the makeup of those costs

you were asked to determine the leverage