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Question: The Ticktock Watch Company manufactures a line of ladies watches which are sold through discount houses. Each watch is sold for P1,500; the fixed costs are P3,600,000 for 30,000 watches or less; variable cost is P900 per watch. Required: with solutions a) What is Ticktock's degree of operating leverage at sales of 12,000 watches? b) If Ticktock's sales will increase by 5%, what would be the percentage of change in profits?
a) Degree of operating leverage = % Change in EBIT / % Change in Sales Fixed costs = P3,600,000 Total Variable Costs = P900 x 12,000 watches = P10,800,000 Total Costs = P3,600,000 + P10,800,000 = P14,400,000 EBIT = Sales - Total Costs EBIT for 12,000 Watches = P1,500 x 12,000 = P18,000,000 % Change in EBIT = 18% % Change in Sales = 5% Degree of operating leverage at sales of 12,000 watches = 18% / 5% = 3.6 b) % Change in Profits = % Change in EBIT x Degree of Operating Leverage % Change in EBIT = 5% Degree of operating leverage = 3.6 % Change in Profits = 5% x 3.6 = 18%
Jan. 23, 2023, 8:05 a.m.
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