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10. Degree of Operating Leverage (DOL) is a ratio concept that gives man- agement an idea of the effect on prots of a small change in quantity assuming that price, xed cost and average variable costs remain the same. The formula for DOL : W. %A(profz'ts) can be written %AQ (a) (b) (C) profits Q(P7AVC)7FC Q(P7AVC)7FC' For a given price P:$5, AVC : $3 and FC=$20000, what is the DOL if the manufacturer is producing 15000 units? (4 points) Using the value of DOL calculated in (a) above, calculate the prots for a 10% increase and 10% decrease in quantity. (3 points) From the DOL formula, you can see that a manufacturing plant with higher xed costs and lower variable costs will have a higher DOL relative to a plant with higher variable costs and lower xed costs i.e. a capital intensive production process will have a higher DOL than a labor intensive process which means that a capital intensive production process will increase prots at a faster rate (relative to quantity) than a labor intensive process. Suppose a company is currently producing 1000 units of a bottled power drink priced at $5. It is using a manufacturing process with a xed cost of $1450 and variable cost of $2.75 per unit (i.e. AVG). i. Calculate the DOL and the break even point for this produc tion process. Is the company breaking even yet? (3 points) ii. If the company installs updated machinery its xed costs rise to $2000 and AVG drops to $2.25. Calculate the DOL and break even point.(3 points) iii. At What production level should the company switch from the old machinery to the upgraded one? (2 points)