The answers that i entered are not correct 4. value: 1.00 points Problem 11-18 O

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The answers that i entered are not correct

4. value: 1.00 points Problem 11-18 Operating Leverage [LO4] Consider a four-year project with the following information: initial fixed asset investment = $600,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $35; variable costs = $28; fixed costs = $240,000; quantity sold = 90,000 units; tax rate = 30 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 318000 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 322900

Explanation / Answer

Using the tax shield approach, the OCF at 90,000 units will be:

OCF = ((Price - variable cost) * Quantity – Fixed Cost)* (1 - TC) + TCD

OCF = ((35 - 28) * (90,000) - 240,000) * (1 - 0.30) + 0.30 * (600,000/ 4)

OCF = 318,000

DOL = 1 + FC / OCF

DOL = 1 + (240,000/ 318,000)

DOL = 1.7547

Part B

The accounting break-even is:

QA= (Fixed Cost + Depreciation) / (Price - variable cost)

QA= (240,000 + (600,000 / 4)) / (35 - 28)

QA= 55,714

And, at the accounting break-even level, the DOL is:

DOL = 1 + (240,000/ (600,000/ 4))

DOL = 2.6000

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