LEVERAGE PROBLEM
Pro-Forma Income Statement
For Projected Sales Level of $ 1,500,000
SALES $ 1,500,000
Less: VC (250,000)
Gross Profit $ 1,250,000
Less: FC 1.050,000
EBIT (Operating Profit) $ 200,000
Assume this pro forma income statement reflects the operating cost structure for a new project. What is projected operating breakeven point for the company given the proposed cost structure?
BE =
Calculate the company's degree of operating leverage (DOL),
DOL =
Using the DOL calculation above, what will be the EBIT if Sales come in 10% BELOW the pro-forma projection?
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Degree of operating leverage= Percentage change in EBIT/Percentage change in sales
Or, 6.25 = Percentage change in EBIT/10%,
Or, Percentage change in EBIT = 62.5%...
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