Sheridan’s Soft Lemonade is starting to develop a new product for which the cash fixed costs...
Sheridan’s Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $70,000. The projected EBIT is $100,000, and the Accounting DOL is expected to be 2.1. What is the Cash Flow DOL? (Round answer to 2 decimal places, e.g. 15.25.)
Homework Answers
| Accounting degree of operating leverage would include depreciation while cahs flow DOL would not include depreciation | ||||||||||
| Calculation of depreciation using accounting DOL | ||||||||||
| Accounting DOL | 1+(Fixed costs +Depreciation)/EBIT | |||||||||
| 2.1 | 1+(70000+Depreciation)/100000 | |||||||||
| 2.1-1 | (70000+Depreciation)/100000 | |||||||||
| (2.1-1)*100000 | (70000+Depreciation) | |||||||||
| 110000 | (70000+Depreciation) | |||||||||
| Depreciation | 110000-70000 | |||||||||
| Depreciation | $40,000 | |||||||||
| Calculation of cash flow DOL | ||||||||||
| Cash flow DOL | 1+(Fixed costs)/(EBIT+Depreciation) | |||||||||
| Cash flow DOL | 1+(70000/(100000+40000) | |||||||||
| Cash flow DOL | 1+(70000/140000) | |||||||||
| Cash flow DOL | 1+0.50 | |||||||||
| Cash flow DOL | 1.50 | |||||||||
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