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A proposed project has fixed costs pf $100,000 per year. The operating cash flow

ID: 2711484 • Letter: A

Question

A proposed project has fixed costs pf $100,000 per year. The operating cash flow at 8,000 units is $89,000. Ignoring the effect of taxes, what is the degree of operating leverage? Round answer to 4 decimal places. If units sold rise from 8,000 to 8,500, what will be the new operating cash flow? Round answer to 2 decimal places. What is the new degree of operating leverage? Round answer to 4 decimal places. Please show steps. A proposed project has fixed costs pf $100,000 per year. The operating cash flow at 8,000 units is $89,000. Ignoring the effect of taxes, what is the degree of operating leverage? Round answer to 4 decimal places. If units sold rise from 8,000 to 8,500, what will be the new operating cash flow? Round answer to 2 decimal places. What is the new degree of operating leverage? Round answer to 4 decimal places. Please show steps.

Explanation / Answer

Degree of operating leverage = Contribution margin / Operating Income

= ( 100000+89000)/89000

= 189000/89000 i.e 2.123596

Contribution per unit = 189000/8000 i.e 23.625

Contribution of 8500 units = 200812.50

Degree of operating leverage = Contribution margin / Operating income

= 200812.50/(200812.50-100000)

= 200812.50/100812.50 i.e 2

New degree of operating leverage = 2

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