You are launching a new online business that produces replicas of the Rosetta Stone. The replicas are sold for $80 each. The fixed annual costs are $1,000 per year and the variable costs are $60/unit. The initial investment of $3,000 can be depreciated using straightline depreciation over 5 years, with a final value of $0. You estimate that this enterprise has a beta equal to the market, and the current market risk premium is 8% and the current yield on Treasury Bills is 2%. Assume, for simplicity, that there are no taxes.

a) what is the degree of operating leverage (DOL) when sales are $7000 (meaning 87.5 units sold). What is the DOL if sales are $12,000?

b) Why is the operating leverage different at these two levels of sales?