Question

# Consider a four-year project with the following information: initial fixed asset investment = \$625,000; straight-line depreciation...

 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.)

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

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