CFA Practice Question

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CFA Practice Question

Consider a firm with sales of $575,000, cost of goods sold of $250,000, fixed operating costs of $120,000, and a financing expense of $150,000. The degree of operating leverage would be closest to ______.

A. 1.24
B. 1.59
C. 2.41
Correct Answer: B

DOL = (S - VC)/(S - VC - F) = ($575 - $250)/($575 - $250 - $120) = 1.59

User Contributed Comments 10

User Comment
haarlemmer Shall we automatically assume COGS is the variable costs? Cause what i did was (575-250+130)/(575-250), which I thought COGS=total cost.
derektl2 COGS = initial price of purchased materials/inventory
it never includes factories, machinery or land
which are major fixed costs
achu Financial costs are financial leverage not operating leverage!
thekapila i think COGS = total cost of good sold = fixed + variable.
while calculating operating income we always do sales - cogs.

VC = 250000-120000 = 13000

S-VC/S-VC-F = 575-130/575-130-120 = 1.36 APPARENTLY NO choice in answers..

i dont want to beleive in answer but cant do much.
steved333 Don't subtract fixed costs from CGS. CGS is variable and doesn't include fixed op. expenses.
jhmorris COGS are not a fixed cost. Think of them in terms of inventory. COGS = Beg. Inventory + Purchases - Ending Inventory. This relationship implies that COGS change as a result of inventory level changes. Inventory contains finished units of the goods the company sells. As a sale of one unit is made, inventory is reduced by one unit. The cost of that unit is COGS. Had the sale not occured, no COGS would have been incurred. This is why COGS should be considered a variable cost rather than a fixed cost.
johntan1979 No need to argue too much. If you are faced with this kind of question in the exam, all you can do is to try your best to plug in the numbers into the formula at the best possible/logical position.
jonan203 jhmorris is right, COGS are variable costs and do not include fixed operating expenses.
ascruggs92 The whole point of COGS is to identify the variable costs associated with the sale of goods. That is why it is separated on the income statement from operating expenses.
khalifa92 cost of goods sold fluctuates with number of units sold thus VC.
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