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Hello Sir,
I really need your help as to how do we tackle this type of question:
Log Co has an operating gearing ratio of 33.33%. Its sales are currently $100m and its operating profit is
$20m.
Operating gearing is calculated by dividing fixed costs by variable costs.What will its operating profit be its sales increases by 15%?
A $27m
B $26m
C $23m
D $21mANSWER: B
Didn’t even understand the logic behind this question!
And in the answer’s explanation, it says “the fixed cost to
variable cost will be in the ratio of 1:3.”
How to derive a ratio in this situation?33.33% is 1/3 of 100%.
Saying that the ratio is 33.33% is another way of saying the the ratio is 1 to 3.
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