A company has annual revenues of $5,000,000, fixed cost of $1,500,000, and variable cost of 30%...

A company has annual revenues of $5,000,000, fixed cost of $1,500,000, and variable cost of 30% of annual revenues. A.) What are the expected profits? B.) What is the degree of operating leverage? C.) If revenues are 40% below expectation, what is the percent decrease in profits?

Expert Solution

A		$
	Revenue	5,000,000
	Variable Cost @30%	1,500,000
	Contribution	3,500,000
	Fixed Cost	1,500,000
	Expected Profits	2,000,000


B	Degree of Operating Leverage	Contribution/Operating Income
	3500000/2000000	1.75


C	Revenue are 40% below	3,000,000.0
	Variable Cost @30%	900,000
	Contribution	2,100,000
	Fixed Cost	1,500,000
	Expected Profits	600,000

	Change in profit	70.00%
		(2000000-600000)/2000000

jeff jeffy answered 8 months ago

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