The Andrea S. Fault Seismometer Company is an all equity financed firm. It earns monthly, after taxes, $24,000 on sales of $880,000. The tax rate of the company is 40 percent. The company’s only product, “The Desktop Seismometer,” sells for $200, of which
$150 is variable cost.
a. What is the company’s monthly fixed operating cost?
b. What is the monthly operating break even point in units? In dollars?
c. Compute and plot the degree of operating leverage (DOL) versus quantity produced and sold for the following possible monthly sales levels: 4,000 units; 4,400 units; 4,800 units; 5,200 units; 5,600 units; and 6,000 units.
d. What does the graph that you drew (see Part (c)) – and especially the company’s DOL at its current sales figure – tell you about the sensitivity of the company’s operating profit to changes in sales?