Afirm that has total fixed costs of $40,000 sells its output for $250 per unit and has an average variable cost of $150. if the firm's cost and revenue curves are linear and output is equal to 500 units, what is the firm's degree of operating leverage?

a. 5
b. 4
c. 3
d. none of the above is correct.

option (A) 5

Explanation:

Data provided in the question:

Total fixed cost = $40,000

Selling price = $250 per unit

Average variable cost = $150

Output = 500 units

Now,

Firm's degree of operating leverage

= {output × ( Selling price - Variable cost )} ÷ {output × ( Selling price - Variable cost )-Total fixed cost}

on substituting the respective values, we get

=

= 50,000 ÷ [ 50,000 - 40,000 ]

= 50,000 ÷ 10,000

= 5

Hence,

The correct answer is option (A) 5

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