Illinois Tool Company's (ITC) Fixed Operating Costs Are $1,260,000 and Its

Multiple Choice

Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70.The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent.ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding.ITC is in the 50 percent corporate income tax bracket.Forecasted sales for next year are $9 million.What is ITC's degree of operating leverage at a sales level of $9 million?

A) 1.60
B) 3.0
C) 1.26
D) 1.875