INTERMEDIATE The Hurricane Lamp Company forecasts that next years sales will be $6 million. Fixed operating costs are estimated to be $800,000, and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at 10 percent interest. It has 20,000 shares of $3 preferred stock and 60,000 shares of common stock outstanding. Hurricane Lamp is in the 40 percent corporate income tax bracket.

1. • Calculate Hurricane Lamps degree of operating leverage (DOL) at a sales level of $6 million using the following:

     1. The definitional formula (Equation 14.1)

     2. The simpler, computational formula (Equation 14.2)

     3. What is the economic interpretation of this value?

     Answer
     • DCL 2.778.