A proposed project has fixed costs of $92,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $92,000 per year. The operating cash flow at 7,900 units is $95,000. Ignoring the effect of taxes, what is the degree of operating leverage? (Round your answer to 4 decimal places. (e.g., 32.1616)) Degree of operating leverage If units sold rise from 7,900 to 8,400, what will be the new operating cash flow? (Do not round intermediate calculations and round your final 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 and round your final answer to 4 decimal places. (e.g., 32.1616))

Explanation / Answer

Degree of Operating Leverage ( DOL) at 7,900 units = 1 +( Fixed Costs / Operating Cash Flow) = 1 + $ 92,000 / $ 95,000 = 1.9684

Percentage change in units = ( 8,400 - 7,900) / 7,900 * 100 = 6.3291 %

At, 8,400 units, percentage change in operating cash flow = 1.9684 x 6.3291% = 12.4582 %

New operating cash flow = $ 95,000 x 1.124582 = $ 106,835

At 8,400 units, new DOL = 1 + $ 92,000 / $ 106,835 = 1.8611

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