Modern Artifacts can produce keepsakes that will be sold for $130 each. Nondepreciation fixed costs are $2,000 per year, and variable costs are $80 per unit. The initial investment of $6,000 will be depreciated straight-line over its useful life of 3 years to a final value of zero, and the discount rate is 14%. a. What is the degree of operating leverage of Modern Artifacts when sales are $11,050? (Do not round intermediate calculations. Round your answer to 2 decimal places.)b. What is the degree of operating leverage when sales are $17,810? (Do not round intermediate calculations. Round your answer to 2 decimal places.)c. Why is operating leverage different at these two levels of sales?

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Asked Feb 6, 2020
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Modern Artifacts can produce keepsakes that will be sold for $130 each. Nondepreciation fixed costs are $2,000 per year, and variable costs are $80 per unit. The initial investment of $6,000 will be depreciated straight-line over its useful life of 3 years to a final value of zero, and the discount rate is 14%.

 

a. What is the degree of operating leverage of Modern Artifacts when sales are $11,050? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the degree of operating leverage when sales are $17,810? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Why is operating leverage different at these two levels of sales?

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a. Calculate the degree of operating leverage when sales are $11,050 as follows:

Step 1: Calculate the total profit as follows:

Finance homework question answer, step 1, image 1

Step 2: Calculate the degree of operating leverage as follows:

Finance homework question answer, step 1, image 2

Therefore, the degree of operating leverage is 17.00.

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