Question

A proposed project has fixed costs of $78,000 per year. The operating cash flow at 4,500 units is $95,600. Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage If units sold rise from 4,500 to 5,000, what will be the new operating cash flow? (Do not round intermediate calculations. Round your 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. Round your answer to 4 decimal places, e.g., 32.1616.) New DOL

Answer 1

Answer a.

Degree of Operating Leverage = 1 + Fixed Costs / Operating Cash Flow
Degree of Operating Leverage = 1 + $78,000 / $95,600
Degree of Operating Leverage = 1.8159

Answer b.

If units sold rise from 4,500 to 5,000:

% Change in Sales = (5,000 - 4,500) / 4,500
% Change in Sales = 0.1111

Degree of Operating Leverage = % Change in Operating Cash Flow / % Change in Sales
1.8159 = % Change in Operating Cash Flow / 0.1111
% Change in Operating Cash Flow = 0.2017

New Operating Cash Flow = Old Operating Cash Flow * (1 +% Change in Operating Cash Flow)
New Operating Cash Flow = $95,600 * (1 + 0.2017)
New Operating Cash Flow = $114,882.52

New Degree of Operating Leverage = 1 + Fixed Costs / New Operating Cash Flow
New Degree of Operating Leverage = 1 + $78,000 / $114,882.52
New Degree of Operating Leverage = 1.6790