# Break-even Analysis Form BREAK-EVEN ANALYSIS - 5
DOL
Q
Q
=
Π
Π
§ Example 4 Given TR and TC, a firm is currently operating at 50% of its capacity at
some profit target
A
0
. How much of a price drop would cause the firm to operate at 75%
capacity at the same level of profit?
Answer: the vertical dotted line on the right marks the firms capacity. Current output is
half of that. Draw the line through A and parallel to TC, this is the “isoprofit” line. From
75% capacity output point, draw the vertical line. B is the intersection. Draw the line TR
2
through B. The slope of TR
2
gives the required output price.
III. OPERATING LEVERAGE
We have seen several types of elasticities: of demand, supply, etc. There is another kind that
is quite popular among financial economists: the elasticity of total profit with respect to
output level, also known as the degree of operating leverage.
!
Definition: The Degree of Operating Leverage (DOL) at a given output level Q is the
percentage change in total profit that results from a one-percent change in units sold:
Change in Profit (in percentage)
__________________________
Degree of Operating Leverage =
Change in Output (in percentage)
For example if, as a result of a 1% increase in output, profit increases by 3% then the DOL
is 3%/1% = 3.
! Algebraically, this may be expressed as:
O Under the special assumptions adopted by break-even analysis (that is, if price and AVC
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