Stromburg Corporation's Degree of Operating Leverage: SEO-Friendly Values

Degree of Operating Leverage

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Stromburg Corporation makes surveillance equipment for intelligence organizations. Its sales are $75,000,000. Fixed costs, including research and development, are $40,000,000, while variable costs amount to 30 percent of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25 percent of sales, and also permit sales to increase to $100,000,000. What is Stromburg's degree of operating leverage at the new projected sales level?

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A. B. C. D. E.

E

Calculate DOL using new sales, new variable cost percentage, and new fixed costs: (In millions) DOL(S) = S-VC/S-VC-FC = $100-$25/($100-$25-$55) = 3.75.

To calculate Stromburg Corporation's degree of operating leverage (DOL) at the new projected sales level, we need to compare the change in operating income (profit) to the change in sales.

Let's calculate the operating income at the current sales level first:

Sales = $75,000,000 Variable costs = 30% of sales = 0.3 * $75,000,000 = $22,500,000 Fixed costs = $40,000,000

Operating income = Sales - Variable costs - Fixed costs Operating income = $75,000,000 - $22,500,000 - $40,000,000 Operating income = $12,500,000

Now, let's calculate the operating income at the new projected sales level:

Sales = $100,000,000 Variable costs = 25% of sales = 0.25 * $100,000,000 = $25,000,000 Fixed costs = $40,000,000 + $15,000,000 (additional fixed costs) = $55,000,000

Operating income = Sales - Variable costs - Fixed costs Operating income = $100,000,000 - $25,000,000 - $55,000,000 Operating income = $20,000,000

Next, we calculate the percentage change in operating income:

Percentage change in operating income = (New operating income - Current operating income) / Current operating income * 100 Percentage change in operating income = ($20,000,000 - $12,500,000) / $12,500,000 * 100 Percentage change in operating income = $7,500,000 / $12,500,000 * 100 Percentage change in operating income = 60%

Finally, we calculate the degree of operating leverage using the formula:

Degree of Operating Leverage (DOL) = Percentage change in operating income / Percentage change in sales

Percentage change in sales = (New sales - Current sales) / Current sales * 100 Percentage change in sales = ($100,000,000 - $75,000,000) / $75,000,000 * 100 Percentage change in sales = $25,000,000 / $75,000,000 * 100 Percentage change in sales = 33.33%

DOL = 60% / 33.33% DOL ≈ 1.8

Therefore, the correct answer is not among the provided options. None of the given options is 1.8.

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