If a firm pays no income taxes and is planning to increase its selling price and...

If a firm pays no income taxes and is planning to increase its selling price and the sales volume in units does not change, what will be the effect on the operating leverage factor? Explain.

What if the firm that pays no income taxes is planning to increase total fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating leverage factor? Explain.

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Expert Solution

Answer 1

If a firm pays no income taxes and is planning to increase its selling price and the sales volume in units does not change, the operating leverage will get reduced.

This will happen reason being the Operating Leverage is the denotation of how much sales will be earned from a certain amount of fixed assets. While increasing the sales price, it will also result in an increase in the denominator.

For an easy understanding, Please refer below example

Answer 2:

The degree of operating leverage is a clear presentation of how of much of the fixed cost is productive and how a firm uses it produce more results. Higher DOL means, the company is using the fixed assets in a better way to generate more revenue.

The effect of increasing total fixed manufacturing costs and decrease variable manufacturing costs per unit on the degree of operating leverage will be increased.

For better understanding, refer below example:

ekkarill92 answered 1 year ago

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