Kenny Kenny is analysing the potential impact of an improving economy on the earnings at Pupkewitz Motors, one of Namibia’s largest car dealers. Pupkewitz is headquartered in Windhoek. Two Pupkewitz Motors divisions produce passenger cars with a combined revenues of N$930 billion. Kenny projects that sales will improve by 10 percent due to the increased demand for cars. He wants to see how Pupkewitz’s earnings might respond given that level of increase in sales. He first looks at the degree of leverage at Pupkewitz, starting with operating leverage. Pupkewitz sold 6 million passengers cars in 2015. The average price per car was N$240 000, fixed costs associated with passenger car production total N$150 billion per year and variable costs per car are N$140 000. What is the degree of operating leverage of Pupkewitz Motors? Explain what that degree of operating leverage tells users of financial information.
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