Degree of Operating Leverage

question 49

Essay

Degree of Operating Leverage. Heat Tamers, Inc., of Bend, Oregon produces special heat-resistant boots used primarily by firefighters, smoke-jumpers and steelworkers. It is contemplating an expansion into the heat resistant leather market charging a price of $150 per pair of boots. The production of each pair of boots would require $60 in materials, and 1.5 hours of labor at the rate of $20 per hour. Energy, supervisory and other variable overhead costs would amount to $25 per unit. The accounting department has derived an allocated fixed overhead charge of $30 per pair of boots (at a projected volume of 280,000 pairs) to account for the expected increase in fixed costs.
A. What is Heat Tamers' breakeven sales volume (in pairs) for heat-resistant boots?
B. Calculate the degree of operating leverage at a projected volume of 280,000 units and explain what the DOL means.

---

Definitions:

Long-Run Equilibrium

A state in economics where all factors of production are fully adjustable, leading to a situation where no economic agent has an incentive to change its behavior.

Monopolistic Competition

A marketplace setup in which a wide range of companies vend products that are comparable but not clones, enabling some level of market sway.

Profit Maximization

The process by which a firm determines the price and output level that returns the greatest profit.

Marginal Revenue

The additional income generated from the sale of an additional product unit, emphasizing its role in determining optimal production levels.