A proposed project has fixed costs of $89,000 per year. The operating cash flow at 10,400...
| A proposed project has fixed costs of $89,000 per year. The operating cash flow at 10,400 units is $127,400. Ignore the effect of taxes. |
| a. | What is the degree of operating leverage? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
| b. | If units sold rise from 10,400 to 11,100, what will be the new operating cash flow? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c. | What is the new degree of operating leverage? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
Homework Answers
Degree of operating leverage = (fixed costs +operating cash flow)/operating cash flow
=(89,000+10,400)/10,400
= 9.5577
Increase in sales = (11,100-10,400)/10400
= 6.7308%
Hence, increase in operating cash flow = increase in sales *degree of operating leverage
= 6.7308%*9.5577
= 64.33%
Hence, new operating cash flow = 127400+64.33%
=$209,356.42
3. Degree of operating leverage = (209,356.42+89,000)/209,356.42
=$1.4251
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