Steele Insulators is analyzing a new type of insulation for interior walls. Mana

Question

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $742,000 and the anticipated annual operating cash flow is $211,000. What is the degree of operating leverage for this project?
Answer

3.78

3.92

4.08

4.27

4.52

Explanation / Answer

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $742,000 and the anticipated annual operating cash flow is $211,000. What is the degree of operating leverage for this project?

Answer= 4.08

Degree of operating leverage = 1 + ($742,000/$241,000) = 4.08

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