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 = $410,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $22; variable costs = $14; fixed costs = $110,000; quantity sold = 71,000 units; tax rate = 32 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.)

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.)

Explanation / Answer

Degree of operating leverage = ( Sales - variable cost) / (Sales - variable cost - fixed cost) Quantity sold 71000 price 22 Less : variable cost 14 Contribution per unit 8 Contribution value 568000 Fixed cost 110000 Degree of operating leverage = 568000 / 568000-110000       = 458000 13750 Break even point = Fixed cost / contribution per unit                                     = 110000 / 8                                     = 13750 units Degree of operating leverage at above level is Contribution ( 13750 * 8) =13750*8 110000 Degree of operating leverage at above level is = 110000/ 110000-110000 = 100000/0                   = 0

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