At a sales level of $270,000, the magnitude of operating leverage for Donuts Unlimited is 2.8. If sales increase by 15%, profits will increase by:

a.

15%

b.

18.67%

c.

2.8%

d.

42%

Option D is correct (42%)

Explanation:

Option D is correct (42%)

In order to find the profit we will proceed as follow:

Given dа ta:

Operating leverage for Donuts Unlimited=2.8

Increase in sale=15%

sales level = $270,000

Required:

Increase in Profit=?

Solution:

% Increase In profit/net income=% Increase in Sales*Operating leverage

% Increase In profit=15%*2.8

% Increase In profit=42%