Question

ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year earned the same profits, $4 million. But it operates with higher fixed costs of $8 million and lower variable costs. a. What is the degree of operating leverage (DOL) for each company? (Defined here as 1 + Fixed costs/Profit.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Answer: Degree of Operating Leverage

A Tech = 2.75

Z Tech = 3

Explanation:

As defined in question itself,

Degree of Operating Leverage = $1 + \frac{fixed\ cost}{Profit}$

As here, it is provided that profit for both the companies are same amounting $4 million.

Although the fixed cost differ by $1 million.

A Tech Degree of operating Leverage = 1 + $\frac{7,000,000}{4,000,000}$ = 2.75

Z Tech Degree of Operating Leverage = 1 + $\frac{8,000,000}{4,000,000}$ = 3

This clearly demonstrates that A Tech will reach its break even faster than the Z Tech as the ratio of fixed cost to variable cost is lower in A tech in comparison to Z Tech.

Answer 2

The degree of operating league(DOL) for ATech is 2.75, and for ZTech is 3.

What is the degree of operating league?

The degree of operating leverage deals with the measurement of how much the operating income of a company changes in response to a change in sales.

A company with advanced operating leverage has a big proportion of fixed costs, meaning a big increase in sales can lead to large changes in profits.

Computation of DOL of both the companies:

According to the given question,

$\text{ Degree of Operating league} = 1+ \dfrac{\text{Fixed Cost}}{\text{Profit}}$

Profits For Both the companies = $4 million.

Fixed cost For ATech = $7,000,000.

And, fixed cost For ZTech = $8,000,000.

Then, DOL of ATech would be:

$\text{ Degree of Operating league} = 1+ \dfrac{\text{Fixed Cost}}{\text{Profit}}\\\\\\\text{ Degree of Operating league} = 1+ \dfrac{\text{\ 7,000,000}}{\text{\ 4,000,000}}\\\\\\\text{ Degree of Operating league} = 2.75$

DOL of ZTech would be:

$\text{ Degree of Operating league} = 1+ \dfrac{\text{Fixed Cost}}{\text{Profit}}\\\\\\\text{ Degree of Operating league} = 1+ \dfrac{\text{\ 8,000,000}}{\text{\ 4,000,000}}\\\\\\\text{ Degree of Operating league} = 3$

Therefore, The DOL for both the companies are 2.75 and 3.

Learn more about degree of operating league, refer:

https://brainly.com/question/865611