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Albatross Airlines’ fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The...

Albatross Airlines’ fixed operating costs are $5.8 million, and its variable cost ratio is 0.20. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Albatross has 300,000 shares of common stock outstanding. Revenues for the firm are $8 million, and the firm is in the 40 percent corporate income tax bracket. Compute the degree of operating leverage for the firm.

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Expert Solution

Degree of Operating Leverage = Contribution/Operating Profit

Contribution = Sales - Variable Cost

Variable Cost = (5.8Mn/0.8)*0.2

Variable Cost = 1.45

Contribution = 8Mn - 1.45Mn

Contribution = 6.55 Mn

Operating Profit = Contribution - Fixed Cost

Operating Profit = 6.55Mn - 5.8Mn

Operating Profit = 0.75 Mn

Degree of Operating Leverage = 6.55 Mn/0.75 Mn

Degree of Operating Leverage = 8.73

jeff jeffy answered 2 years ago
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