ABC Company is evaluating the potential profitability of producing a new gadget. The management is considering three different levels of fixed asset investment, each with its own set of

fixed costs and production capacities. Students must calculate the operating leverage for each level and determine which offers the most advantageous risk$/$reward profile based on a given

sales forecast.

Given Data:

Selling Price per Unit $($SP$)$: $$30$

Variable Cost per Unit $($VC$)$: $$10$

Expected Sales Volume $($Q$)$: $5,000$ units

Calculate the degree of operating leverage $($DOL$)$ for Low Fixed Asset Investment $($Low FAl$)$: Fixed Costs $($FC$)=$$$20,000$

Multiple Choice

$1\mathrm{.}25$

$4\mathrm{.}0$

$225$

$1\mathrm{.}0$