ASSIGNMENT INFORMATION

1. Due Date
Sunday, October 7, 201811:59 PM
Points Possible
10
2. Continue to read the Module on the topic of Cost Analysis. Answer the following questions in English.
If you obtained information from a different source then your text book, identify your source.
Remember all assignment must be handed in no later than the due date.

1. What information does the degree of operating leverage provide to management of a firm?
2. How do we define cost elasticity? Is there any relationship between cost elasticity and economies of
scale? Show and explain why.

EXERCISE 1
Degree of Operating Leverage. Untouchable Package Service (UPS) offers overnight
package delivery to Canadian business customers. UPS has recently decided to expand its
facilities to better satisfy current and projected demand. Current volume totals two
million packages per week at a price of $12 each, and average variable costs are constant
at all output levels. Fixed costs are $3 million per week, and profit contribution averages
one-third of revenues on each delivery. After completion of the expansion project, fixed
costs will double, but variable costs will decline by 25%.
a. Calculate the change in UPS's weekly breakeven output level that is due to
expansion.
b. Assuming that volume remains at two million packages per week, calculate the
change in the degree of operating leverage that is due to expansion.
c. Again assuming that volume remains at two million packages per week, what is the effect of
expansion on weekly profit?