Question

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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