A proposed project has fixed costs of $84,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $84,000 per year. The operating cash flow at 6,400 units is $95,800. 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 6,400 to 6,900, 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))

Explanation / Answer

Degree of operating leverage = sales variable costs / sales variable costs fixed costs.

A) Sinc variable cost is not given, I am presuming it to be zero. then DOL would be :

95800-0/ 95800-0-84000 = 8.1186

B) 95,800$ units generated from 6400 units , so per unit revenue = 95800/6400 = $14.96875/unit

for 6900 units revenue = 14.9687*6900 = $103824.3750

C) New DOL = 103824.375 - 0/103824.375 - 0 - 84000 = 5.3558

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