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Question: The Ticktock Watch Company manufactures a line of ladies watches which are sold through discount houses. Each watch is sold for P1,500; the fixed costs are P3,600,000 for 30,000 watches or less; variable cost is P900 per watch. Required: a) What is Ticktock's degree of operating leverage at sales of 12,000 watches? b) If Ticktock's sales will increase by 5%, what would be the percentage of change in profits?
a) Degree of Operating Leverage at 12,000 watches = (1,500 x 12,000)/(3,600,000 + 900 x 12,000) = 4.22x b) Percentage of Change in Profits = (5% x 12,000 x 1,500 - 900 x 12,000 x 5%) / (3,600,000 + 900 x 12,000) = 30.77%
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