Corporate Finance Q122
0. 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 |
Compared with Company B, Company A has:
- 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.
