A proposed project has fixed costs of $96,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $96,000 per year. The operating cash flow at 6,600 units is $96,200. Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.)

Degree of operating leverage ???

If units sold rise from 6,600 to 7,100, what will be the new operating cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Operating cash flow ???

What is the new degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.)

New DOL ???

Explanation / Answer

1)

Degree of operating leverage = Contribution margin / net operating income

Contribution margin = operating cash flow + fixed costs = $96,200 + $96,000 = $192,200

Net operating income = $96,200

Degree of operating leverage = $192,200 / $96,200 = 1.99

2)

Operating Cash flow at 7100 units will be = $96,200 * 7,100 / 6,600 = $103,488

3)

Contribution margin =$103,488 + $96,000 = $199,488

Net operating income =$103,488

New Degree of operating leverage = $199,488 / $103,488 = 1.92

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