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It is December 31. Last year, Aberdeen Petroleum Refiners Corp. had sales of $12,000,000, and...

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Accounting

It is December 31. Last year, Aberdeen Petroleum Refiners Corp. had sales of $12,000,000, and it forecasts that next years sales will be $11,160,000. Its fixed costs have been and are expected to continue to be $6,600,000, and its variable cost ratio is 7.50%. Aberdeens capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The companys profits are taxed at a marginal rate of 40%.

Given this data, complete the following sentences:

The percentage change in the companys sales is_________ .
The percentage change in Aberdeens EBIT is________ .
The degree of operating leverage (DOL) at $11,160,000 is______ .

There are several ways to use and interpret a firms DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value.

Assume that at a given sales level, a firms DOL is 2.5. This means that a 1% change in the firms sales will result in a corresponding 2.5% change in the firms EBIT.

True or False: This statement accurately describes a firms DOL. ________

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