DEGREE OF OPERATING LEVERAGE CALCULATION IN PRODUCTION MANAGEMENT

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QUESTIONS:

Given the following information:

UNIT SOLD	SALES	COSTS
20,000	N40,000	N 80,000
40,000	N 80,000	N 100,000
60,000	N 120,000	N 200,000
80,000	N 160,000	N 140,000
100,000	N 200,000	N 160,000
120,000	N 240,000	N 180,000

Compute the degree of operating leverage at 100,000 units and 80,000 units of output and explain your findings.

ANSWERS:

Formula for Degree of Operating Leverage:

DOL =    % change in profit

           %change in unit sold

UNIT SOLD	SALES	COSTS	PROFIT
20,000	N40,000	N 80,000	-40,000
40,000	N 80,000	N 100,000	-20,000
60,000	N 120,000	N 200,000	-80,000
80,000	N 160,000	N 140,000	20,000
100,000	N 200,000	N 160,000	40,000
120,000	N 240,000	N 180,000	60,000

You compute the profit first before you solve by doing this: Sales – Costs; i.e. 40,000-80,000 = -40,000. That is how we got the first -40,000. You will continue like that in the next row.

After that, we can now calculate the Degree of Leverage as thus:

DOL =    60,000 – 40,000

                    40,000    

DOL =         20,000

                    40,000    

DOL =        0.5

 We got 60,000 and the 40,000 figure is from the profit.

We just solved for sales and we are going to solve for units:

The same steps.

DOL =    120,000 – 100,000

                    100,000    

DOL =         20,000

                    100,000    

DOL =        0.2

Finally, you calculate all together like this:

DOL = 0.5

           0.2 

DOL = 2.5

This calculation is for 100,000 units.  You are going to calculate for 80,000. Let me give you a hint on it: you will start by using the figure of 100,000 when calculating for 80,000.  Because, we use the figure of 120,000 when we calculated for 100,000.

So the figures for sale in 80,000 are: 40,000 and 20,000 respectively.