Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT). The firm's current degree of operating leverage is 2.50. It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units. Last year's EBIT was $60,000. Based on a degree of operating leverage of 2.5, what is this year's expected EBIT with the increase in sales?
A) $108,300
B) $ 97,741
C) $ 92,854
D) $102,885
E) $114,000

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) formula is: DOL = % Change in EBIT / % Change in Sales. Given DOL = 2.5, % Change in Sales = (170,000 - 125,000) / 125,000 = 0.36 or 36%. Therefore, % Change in EBIT = 2.5 * 0.36 = 0.9 or 90%. Last year's EBIT was $60,000, so this year's expected EBIT = $60,000 * (1 + 0.9) = $114,000.

Kulwicki Corporation Wants to Determine the Effect of an Expansion