Question

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 12,000...

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 12,000 units is $70,000.

  

a. Ignoring the effect of taxes, what is the degree of operating leverage?

  

b. If units sold rise from 12,000 to 12,400, what will be the increase in operating cash flow?

  

c. What is the new degree of operating leverage?
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Answer #1
a) Contribution margin = operating cash flow + fixed cost
=$70000+36000
=$106000
Operating leverage = Contribution margin / opearting cash flow
=$106000/70000
=1.51
b) Increase in operating cash flow = $106000/12000*400
=3533.33
c) New operating leverage
Contribution = $106000/12000*12400 =109533.33
Operating cash flow = $109533.33-36000
=$73533.33
Degree of operating leverage = $109533.33/73533.33
=1.49
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