Consider a four-year project with the following information: initial fixed asset

Question

Consider a four-year project with the following information: initial fixed asset investment = $590,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34; variable costs = $26; fixed costs = $230,000; quantity sold = 89,000 units; tax rate = 35 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.)

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.)

Explanation / Answer

Operating leverage can be calculated using the below formula

Degree of operating leverage = (sales variable costs) / (sales variable costs fixed costs)

At given level of output,

Sales = 89000 * 34 = 3,026,000

Variable Costs = 89000 * 26 = 2,314,000

Fixed costs = 590000 + 230000 = 820,000

After substituting values in the above equation, we get Degree of operating leverage as -6.5926

2) Break even is when Sales = Variable costs + fixed costs

Here fixed costs are same as calculated above = 820,000

Lets assume x is the units at which break even happens, so equation is as follows

34 * x = 26 * x + 820000

After solving we get x as 136,666.7, so breakeven units are 136,667 units

Now

Degree of operating leverage = (sales variable costs) / (sales variable costs fixed costs)

Sales = 136667 * 34 = 4646678

Variable Costs = 136667 * 26 = 3553342

So after substituting values in above equation, we get

Degree of operating leverage as 4.0000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.