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Operating Leverage Analysis and Examples

This document provides an example of operating leverage and calculates the degree of operating leverage (DOL) for two companies, Co A and Co B, based on a 10% increase or decrease in sales. It shows that for Co A, a 10% increase in sales led to a 30% increase in operating profit, resulting in a DOL of 3. For Co B, a 10% increase in sales led to a 45% increase in operating profit, resulting in a DOL of 4.5. The DOL represents the percentage change in operating profit divided by the percentage change in sales.

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79 views8 pages

Operating Leverage Analysis and Examples

This document provides an example of operating leverage and calculates the degree of operating leverage (DOL) for two companies, Co A and Co B, based on a 10% increase or decrease in sales. It shows that for Co A, a 10% increase in sales led to a 30% increase in operating profit, resulting in a DOL of 3. For Co B, a 10% increase in sales led to a 45% increase in operating profit, resulting in a DOL of 4.5. The DOL represents the percentage change in operating profit divided by the percentage change in sales.

Uploaded by

AAM26
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Operating Leverage Example

Co A 10% Increase Co B
Sales 12000 13200 12000
Variable Cost 6000 6600 3000
Fixed Cost 4000 4000 7000
Operating Profit 2000 2600 2000
(2600-2000)/2000
Op. Profit % Change 30.0%
% In Profit/% change in sales
30%/10%
DOL 3

Co A 10% Decrease Co B
Sales 12000 10800 12000
Variable Cost 6000 5400 3000
Fixed Cost 4000 4000 7000
Operating Profit 2000 1400 2000
(2600-2000)/2000
Op. Profit % Change -30.0%

Leverage Chapter Exercise

Solution For 300 Units For 260 units For 340 Units
Sales Revenue 300*24.5= 7350 6370
Minus Variable Op. Cost 300*9.5= 2850 2470
Minus Fixed Cost 3825 3825
EBIT or Operating Profit 675 75

% Change in Sales (from 300 to 260 Units)

% Change in EBIT

DOL= % Change in EBIT/% Change in Sales


(-0.8889/-0.1333)
6.67 Qbe=

Q
DOL at Q units=
Q- Qbe

300
DOL at 300 units=
300-255

6.67
10% Increase
13200
3300
7000
2900
(2900-2000)/2000
45.0%

45%/10%
4.5

10% Decrease
10800
2700
7000
1100
(2900-2000)/2000
-45.0%

255 units
6247.5
2422.5
3825 % change in sales 0.019608
0 % change in ebit #DIV/0!
% Change= (New-Old)/Old
(6370-7350)/7350
-0.1333

(75-675)/675
-0.8889
FC/(P-VC)
3825/(24.5-9.5)
255 units
EBIT
less: interest exp (150,000*15%)
Net Profit before tax
Less: Tax (@40%)
Net Profit After Tax
Less: Preferred Stock Dividend
Earnings Available for Common Stock Holders

EPS= Earnings available for Common Stockholders/No. of Common Stock


EPS

DFL= % Change in EPS/ % Change in EBIT


.467/.327
1.43

At 75000 unit level, DFL= 1.43 means if EBIT increases by 1%, EPS will increase

DFL at EBIT (75000)=75000/{75000-22500-(0*1/(1-.4))}


75000/52500
1.43
Base or Old New Change
75,000 99,500 (99500-75000)/75000
-22500 -22500 0.3267
52,500 77,000
-21000 -30800
31,500 46,200
0 0
$ 31,500 $ 46,200

$31500/3500 $46200/3500
$ 9 $ 13.20 (13.20-9)/9
0.4667

will increase by 1.43% and vice versa

52500

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