PLEASE SHOW WORK! Consider a four-year project with the following information: i

Question

PLEASE SHOW WORK!

Consider a four-year project with the following information: initial fixed asset investment = $410,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $22; variable costs = $14; fixed costs = $110,000; quantity sold = 71,000 units; tax rate = 32 percent. What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage What is the degree of operating leverage at the accounting break-even level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage

Explanation / Answer

Contribution per unit = $22-$14 = $8

BEP = ($110,000+$102,500)/$8 = 26,563 units

Degree of operating leverage at current level = Contribution/EBIT

= 71,000×$8/($8×71,000-$110,000)

= 1.2402

Degree of operating leverage at BEP = Contribution/EBIT

= 26,563×$8/($8×26,563-$110,000)

= 2.0732

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