a project requires an initial.investment of $36,000 land is depreciated straight

Question

a project requires an initial.investment of $36,000 land is depreciated straight-line to zero salvage over its 6-years project produces items that sell for $150 each, with variable cost of $60 per unit. fixed cost are $5,000 per year. required return on investment is 15% a project requires an initial.investment of $36,000 land is depreciated straight-line to zero salvage over its 6-years project produces items that sell for $150 each, with variable cost of $60 per unit. fixed cost are $5,000 per year. required return on investment is 15% a project requires an initial.investment of $36,000 land is depreciated straight-line to zero salvage over its 6-years project produces items that sell for $150 each, with variable cost of $60 per unit. fixed cost are $5,000 per year. required return on investment is 15%

Explanation / Answer

Degree of operating leverage (DOL) = Contribution / Profit

Profit = Investment × Rate

          = $36,000 × 15%

          = $5,400

Depreciation = $36,000 / 6 = $6,000

Fixed cost = $5,000 + $6,000 = $11,000

Contribution = Profit + Fixed cost

                      = $5,400 + $11,000

                      = $16,400

DOL = Contribution / Profit = $16,400 / $5,400 = 3.04 (Answer)

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