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 data:

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%

answer/// real gdp decreases to y3 and the price level falls to p3;