Question

Consider a four-year project with the following information: initial fixed asset investment = $625,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $51; variable costs = $39; fixed costs = $300,000; quantity sold = 121,000 units; tax rate = 23 percent.

  

a.	What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
b.	What is the degree of operating leverage at the accounting break-even level of output? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Answer 1

a) Statement showing OFC

Particulars	Amount
Selling price per unit	51
Less : Variable cost per unit	39
Contribution per unit	12
No of units sold	121000
Total contribution	1452000
Less : Fixed cost	300000
Less : Depreciation	156250
EBIT	995750
Less : Tax @ 23%	229023
NOPAT	766728
Add: Depreciation	156250
Operating cash flow	922978

Degree of operating leverage = 1 + Fixed cost/OFC

=1 + 300000/922978

=1+0.3250

=1.3250

b) Accounting break even point = Fixed cost + depreciation / contribution per unit

=300000+156250 / (51-39)

=456250/12

=38020.83

i.e 38021 units

Statement showing  OFC

Particulars	Amount
Selling price per unit	51
Less : Variable cost per unit	39
Contribution per unit	12
No of units sold	38021
Total contribution	456252
Less : Fixed cost	300000
Less : Depreciation	156250
EBIT	0
Less : Tax @ 23%	0
NOPAT	0
Add: Depreciation	156250
Operating cash flow	156250

Degree of operating leverage = 1 + Fixed cost/OFC

=1 + 300000/156250

=1+1.9200

=2.9200