Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.

a. What are expected profits based on these expectations?

b. What is the degree of operating leverage based on the estimate of fixed costs and expected profits?

c. If sales are 10% below expectation, what will be the decrease in profits?

d. Show that the percentage decrease in profits equals DOL times the 10% drop in sales.

e. Based on the DOL, what is the largest percentage shortfall in sales relative to original expectations that the firm can sustain before profits turn negative? What are break-even sales at this point?

f. Confirm that your answer to (e) is correct by calculating profits at the break-even level of sales.