A project has fixed costs of $900 per year, depreciation charges of $300 a year,

Question

A project has fixed costs of $900 per year, depreciation charges of $300 a year, annual revenue of $8,100, and variable costs equal to two-thirds of revenues.

If sales increase by 18%, what will be the increase in pretax profits? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places)

What is the degree of operating leverage of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A project has fixed costs of $900 per year, depreciation charges of $300 a year, annual revenue of $8,100, and variable costs equal to two-thirds of revenues.

Explanation / Answer

Solution.

A. After change in sale.

B. Calculation for operating leverage.

= Contribution margin / opereting income

= 3,186 / 1,986 = 1.60

Particulars Amount Revenue                         8,100 variable costs                      (5,400) Contribution margin                         2,700 Depreciation                          (300) Fixed costs                          (900) Pretax profits                         1,500

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