5 Computing and interpreting the degree of operating leverage (DOL) It is December 31 Last year, Aberdeen Petroleum Refiners Corp had sales of $16,000,000, and it forecasts that next years sales will be $14,240,000 Its fixed costs have been and are expected to continue to be $6,400,000, and its variable cost ratio is 7 50 Aberdeens capital structure consists of a $13 5 million bank loan, on which it pays an interest rate of 9 , and 250,000 shares of common equity The companys profits are taxed at a marginal rate of 40 Given this data, complete the following sentences The percentage change in the companys sales is The percentage change in Aberdeens EBIT is The degree of operating leverage (DOL) at $14,240,000 is There are several ways to use and interpret a firms DOL value Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value Assume that a firms fixed costs remain constant across a range of sales values As a result, its DOL will vary across the range of sales values True or False This statement accurately describes a firms DOL True False

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5. Computing and interpreting the degree of operating leverage (DOL) It is December 31. Last year, Aberdeen Petroleum Refiners Corp. had sales of $16,000,000, and

5. Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Aberdeen Petroleum Refiners Corp. had sales of $16,000,000, and it forecasts that next years sales will be $14,240,000. Its fixed costs have been and are expected to continue to be $6,400,000, and its variable cost ratio is 7.50%. Aberdeens capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The companys profits are taxed at a marginal rate of 40%.

Given this data, complete the following sentences:

	The percentage change in the companys sales is .
	The percentage change in Aberdeens EBIT is .
	The degree of operating leverage (DOL) at $14,240,000 is .

There are several ways to use and interpret a firms DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value.

Assume that a firms fixed costs remain constant across a range of sales values. As a result, its DOL will vary across the range of sales values.

True or False: This statement accurately describes a firms DOL.

True

False