A project has the following estimated data: price = $200 per unit; variable costs = $150 per unit; fixed costs = $400,000; required return = 9%; initial investment = $1,500,000; $200,000 salvage value; life = 15 years. What is the degree of operating leverage at the financial break-even level of output?
A) 1.23
B) 2.23
C) 3.23
D) 4.23
E) 5.23

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) at the financial break-even point is calculated using the formula: DOL = 1 + (Fixed Costs / (Price - Variable Costs) * Quantity). At the financial break-even point, the net present value (NPV) is zero, and the quantity is calculated to cover all costs including the required return. The correct DOL value is 3.23.

A Project Has the Following Estimated Data: Price = $200