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 = $460,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28; variable costs = $18; fixed costs = $150,000; quantity sold = 76,000 units; tax rate = 32 percent.

What is the degree of operating leverage at the given level of output?

What is the degree of operating leverage at the accounting break-even level of output?

Consider a four-year project with the following information: initial fixed asset investment = $460,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28; variable costs = $18; fixed costs = $150,000; quantity sold = 76,000 units; tax rate = 32 percent.

Explanation / Answer

Depreciation per year = (460000 /4) = 115000

Contribution = unit sold (selling price -variable cost)

                     = 76000 ( 28-18)

                     = 76000*10

                       = $ 760,000

Less:Fixed cost (150,000)

Depreciation      (115,000)

Income before tax 495000

less:Tax                 (158400)

net income          336600

a)Operating leverage = contribution / net income

                                    = 760000 / 336600

                                      = 2.26

b)Degree of operating leverage = :

At break even ,contribution = fixed cost = 150000 +115000 = 265000

net income=0

degree of operating leverage = 265000/.0

                                                    = infinity or cannot be determined

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