A proposed project has fixed costs of $100,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $100,000 per year. The operating cash flow at 8,000 units is $89,000. Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage If units sold rise from 8,000 to 8,500, what will be the new operating cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Operating cash flow $ What is the new degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) New DOL

Explanation / Answer

Degree of Operating Leverage = 1 + Fixed Cost / OCF

Degree of Operating Leverage = 1 + 100,000/89,000

Degree of Operating Leverage = 2.12

% change in quantity sold = (8,500 - 8,000) / 8,000

% change in quantity sold = 6.25%

So, the OCF at 8,500 units sold is :(1 + 0.0625)*89,000

New OCF = $94,562.5

Degree of Operating Leverage = 1 + Fixed Cost / OCF

New Degree of Operating Leverage = 1 + 100,000/94,562.5

Degree of Operating Leverage = 2.06

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