Martelli Drywall Manufacturing is analyzing a new type of drywall sealant for in

Question

Martelli Drywall Manufacturing is analyzing a new type of drywall sealant for interior walls. Management has compiled the following information to determine whether or not this new sealant should be manufactured. Projected fixed costs are $782,320 and the anticipated annual operating cash flow is $254,000. The sealant project has an initial fixed asset requirement of $1,750,000, which would be depreciated straight-line to zero over the 10-year life of the project. What is the degree of operating leverage for this project?

3.78

3.92

4.08

4.27

4.52

3.78

3.92

4.08

4.27

4.52

Explanation / Answer

Solution.

Calculation for opereting leverage.

= $1,036,320 / $254,000

= 4.08

Particular Amount Contribution margin    1,036,320.00 Fixed Cost        782,320.00 Opereting cash flow        254,000.00 Depreciation     (175,000.00) EBIT          79,000.00

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