10.5 Reworking Table 10-6 for the normal level of sales and 10% higher sales gives the following:

For the high-fixed-cost policy, profits increase by 54.5%, from $550,000 to $850,000. For the low-fixed-cost policy, profits increase by 46.5%. In both cases the percentage increase in profits equals DOL times the percentage increase in sales. This illustrates that DOL measures the sensitivity of profits to changes in sales.

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High Fixed Costs High Variable Costs Normal 10% Higher Sales Normal 10% Higher Sales Sales 16,000 17,600 16,000 17,600 - Variable costs 13,000 14,300 13,440 14,784 - Fixed costs 2,000 2,000 1,560 1,560 - Depreciation 450 450 450 450 Pretax profit 550 850 550 806