Answer:
The degree of leverage = 5.2
Explanation:
The Degree of Leverage (DOL) measures how a company's operating costs changes with change in sales, by comparing the fixed costs, and variable costs with the selling price. A production process with a high fixed cost amount with respect to variable cost will not change much with changes in sales amount. It in effect seeks to determine what percentage of the total cost is the fixed cost.
The formula for calculating DOL is shown below;
DOL = (selling price - variable cost) ÷ (sales - variable cost - fixed cost)
sales = 2000 units at $40 per unit
∴ selling price = $40 × 2000 = $80,000
variable cost = 35% of selling price = 0.35 × 80,000 = $28,000
fixed cost = $42,000
∴ DOL = (80,000 - 28,000) ÷ (80,000 - 28,000 - 42,000)
= 52,000 ÷ 10,000 = 5.2
