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Hello sir im unable to get the answer for this question.
Log co has an operating gearing ratio of 33.33%. Its sales are currently $100 million and its operating profit is $20million. Operating gearing is calculated by dividing fixed cost by variable costs.
What will its operating profit be if sales increase by 15%?
I find the total cost 100-20 ie 80$. Pls help
Total costs are $80M.
Given that the fixed costs are 1/3 of the variable costs, the fixed costs must be 1/4 of the total costs i.e. $20M, and the variable costs must be 3/4 of the total costs i.e. $60M. (and it checks in that 20/60 = 33.33%).
So the contribution is 100 – 60 = $40. So if sales increase by 15% then the contribution will increase by 15% also.