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Question 6 [24] Hardware House (Pty) Ltd is a retailer of a wide range of hardware products. It has branches throughout the country and its strategy is to increase its sales revenue by opening more stores. The company rents the premises of all its stores. The executive management, however, is concerned that its strategy could be very harmful to operating profits should there be a downturn in the economy, such as a recession. One of the financial tools management wants to use to assess the vulnerability of its profits is to determine the operating leverage of the business. At the last executive management meeting, the following information was tabled, discussed and approved to be used to determine operating leverage: 2019 Actual 2020 projected increase (decrease) Revenue R25 670 000 R30 804 000 Cost of goods sold 17 110 000 20 874 200    Operating expenses 3 523 000 3 748 460 Selling expenses 1 080 000 1 004 400 General and administrative expenses 1 870 000 1 944 800 Property rent expense 350 000 549 500 Depreciation 223 000 1249 760 Required: 6.1. Complete the information in the table for 2019 and 2020, and then use the information in the table to calculate Hardware House’s degree of operating leverage (DOL) and explain its effect on operating profit. (18) 6.2. Should the company be concerned about the possible negative effect that its strategy can have on profits in poor economic conditions? Give reasons for your answer. (6)

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