Your clothing business, FashionV Co has fixed costs of $1,000 per year, depreciation charges of $500 a year, annual revenue of $6,000, and variable costs equal to two-thirds of revenues. A) What is the degree of operating leverage (DOL)? B) Due to the pandemic Covid-19, you decided to close your clothing business shop and moved to an online business resulting in a reduction in fixed costs of $500 per year and the rest of the variables remain unchanged. What is the new degree of operating leverage (DOL)? C) Risk is reduced when a high proportion of costs are fixed. Based on your observation in answers A and B, do you agree with the statement? Which business is riskier, a physical clothing shop with high DOL or an online clothing shop with lower DOL? Explain.
Your clothing business, FashionV Co has fixed costs of $1,000 per year,
A) What is the degree of operating leverage (DOL)?
B) Due to the pandemic Covid-19, you decided to close your clothing business shop and moved to an online business resulting in a reduction in fixed costs of $500 per year and the rest of the variables remain unchanged. What is the new degree of operating leverage (DOL)?
C) Risk is reduced when a high proportion of costs are fixed. Based on your observation in answers A and B, do you agree with the statement? Which business is riskier, a physical clothing shop with high DOL or an online clothing shop with lower DOL? Explain.
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