A proposed project has fixed costs of $76,000 per year. The operating cash flow
ID: 2637636 • Letter: A
Question
A proposed project has fixed costs of $76,000 per year. The operating cash flow at 7,600 units is $88,200. Ignoring the effect of taxes, what is the degree of operating leverage? (Round your answer to 4 decimal places. (e.g., 32.1616))
If units sold rise from 7,600 to 8,100, what will be the new operating cash flow? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What is the new degree of operating leverage? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
A proposed project has fixed costs of $76,000 per year. The operating cash flow at 7,600 units is $88,200. Ignoring the effect of taxes, what is the degree of operating leverage? (Round your answer to 4 decimal places. (e.g., 32.1616))
Explanation / Answer
OPERATING LEVERAGE = CONTRIBUTION / EBIT
==> EBIT(Operating cash flow ) = CONTRIBUTION - FIXED COST
=> CONTRIBUTION = EBIT + FIXED COST
=> $76,000 + 88,200
=>$164,200
DOL= $164,000 / $88200
=>1.86 TIMES
B) PRESENT CONTRIBUTION PER UNIT
=>$164,000 / 7600 UNITS
=$21.58 / UNIT
=> CONTRIBUTION PER 8100 UNITS = 8100 * $21.58
=>$174,800
OPERATING CASH FLOW @8100 UNITS = $174,800 - $76,000
==> $98,800
= NEW DEGREE OL = $174,800 / $ 98,800
=>1.77 TIMES
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