Corporate Finance Q100
100While analyzing the impact of the economy’s growth on the revenues generated by Com Point, Mr. Shah recorded earnings of Rs.200 billion and expected them to grow by 10% due to the increasing demand. To evaluate the impact of this, he wants to calculate the operating leverage with the following data:
| Sales in 2009 | 22.5 million computers |
| Average price per computer | Rs.90,000 |
| Fixed costs for the period | Rs.33 billion |
| Variable costs per computer | Rs.70,000 |
What is the degree of operating leverage (DOL)
- Option : B
- Explanation : DOL = [Q (P - V)] / [Q (P - V) - F] =[22.5 million (Rs.90,000 – Rs.70,000)] / [22.5 million (Rs.90,000 – Rs.70,000) – 33 billion] = 1.08 For a 10 percent increase in computers sold, operating income increases by 1.08 * 10% = 10.08%.
