A proposed project has fixed costs of $74,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $74,000 per year. The operating cash flow at 8,000 units is $93,400. 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.)

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.)

What is the new degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.)

Explanation / Answer

Contibution = EBIT + Fixed cost

= 93400 + 74000

= 167400

Operating leverage = Contibution/EBIT = 167400/93400 = 1.79

At the level of 8500

Contribution at 8000 = 167400

Contibution at 8500 = (167400/8000)x8500 = 177862.50

Operating cash flow = 177862.50 - 74000

= 103862.50

New degre of operating leverage = 177862.50/103862 = 1.71

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