Degree of Operating Leverage
McGonnigal, Inc., has expected sales of $40 million. Fixed operating cost are $5 million, and the variable cost ratio is 65 percent. McGonnigal has outstanding a $10 million, 10% bank loan, and $3 million in 12% coupon – rate bonds. Mcgonnigal has outstanding 250,000 share of a $10 (dividend) preferred stock and 1 million shares of common stock ($1 par value).
McGonnigal’s avg. tax rate is 35 percent, and is margianl rate is 40%.
a. What is McGonnigal’s degree of operating leverage at a sales level of $40 million?