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 4.50.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 4.50,what is this year's expected EBIT with the increase in sales?
A) $157,200
B) $138,336
C) $196,500
D) $193,356
E) $147,768

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is a measure of how much a company's operating income (EBIT) will change in response to a change in sales. It is calculated as follows:DOL = % Change in EBIT / % Change in SalesIn this case, the DOL is 4.50, which means that a 1% increase in sales will lead to a 4.50% increase in EBIT.The company is projecting a 45,000 unit increase in sales, which is a 36% increase over last year's level of 125,000 units.Therefore, we can expect EBIT to increase by 36% * 4.50% = 162%.Last year's EBIT was $60,000, so this year's EBIT is expected to be $60,000 * 1.62 = $97,200.

Kulwicki Corporation Wants to Determine the Effect of an Expansion