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 = $510,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $20; variable costs = $10; fixed costs = $150,000; quantity sold = 81,000 units; tax rate = 34 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.)

Consider a four-year project with the following information: initial fixed asset investment = $510,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $20; variable costs = $10; fixed costs = $150,000; quantity sold = 81,000 units; tax rate = 34 percent.

Explanation / Answer

Degree of Operating leverage at the given level of output = Contribution margin / Net operating income

= ($1620000-$810000) / ($1620000-$810000-$150000)

= $810000/$660000

= 1.23

Degree of Operating leverage at the accounting break-even level of output = (300000-150000) / ($300000-150000- 150000)

= $150000/0

= Infinity

Degree of Operating leverage is greatest at break even point

Company's break even level sales = Fixed cost / Contribution margin

= $150000/0.5

= $300000

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