61. Refer to the following data of companies producing similar products.

Company A | Company B | |

Number of units produced and sold | 1.5 million | 1.5 million |

Sale price per unit | $150 | $150 |

Variable cost per unit | $90 | $75 |

Fixed operating costs | $30 million | $60 million |

Fixed financing expenses | $15 million | $7.5 million |

Degree of operating leverage (DOL) | ? | 2.14 |

Degree of financial leverage (DFL) | 1.33 | 1.17 |

- Option :
- Explanation :
**Company A****Company B**DOL

= Q (P - V) / Q (P - V) -

F1.5 (150 - 90) / 1.5 (150 - 90)

- 30 = 1.51.5 (150 - 75) / 1.5 (150 - 75) -

60 = 2.14DFL

= Q (P - V) - F / Q (P -

V) - F - C1.5 (150 - 90) - 30 / 1.5 (150 -

90) - 30 - 15 = 1.331.5 (150 - 75) - 60 / 1.5 (150 -

75) - 60 - 7.5 = 1.17DTL

= DOL x DFL

1.5 x 1.33 = 2.0 2.14 x 1.17 = 2.50 The DOL is lower for Company A than Company B (as per the table),meaning Company A’s operating income is less sensitive to a change in the units sold relative to Company B. Section 3.3, 3.4 and 3.5.

- Option : A
- Explanation : Bases of the following equation: DTL = [Q (P - V)] / [Q (P - V) - F - C] By switching to accelerated depreciation method, the fixed cost increases. Therefore, the DTL increases (i.e. the numerator does not change and denominator decreases).

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