A project has an estimated sales price of $71 per unit, variable costs of $44.03 per unit, fixed costs of $57,000, a required return of 14 percent, an initial investment of $79,500, no salvage value, and a life of four years. Ignore taxes. What is the degree of operating leverage at the financial break-even level of output?
A) 2.72
B) 3.09
C) 2.53
D) 3.03
E) 1.48

Question

Quizplus · Accepted Answer

To find the degree of operating leverage (DOL) at the financial break-even point, we first need to calculate the break-even point in units:

Break-even point (in units) = (Fixed costs + Depreciation) / (Sales price per unit - Variable cost per unit)

Depreciation = initial investment / number of years = $79,500 / 4 = $19,875

Break-even point (in units) = ($57,000 + $19,875) / ($71 - $44.03) = 2,686.93 ≈ 2,687 units

Next, we need to calculate the contribution margin per unit, which is the difference between the sales price per unit and the variable cost per unit:

Contribution margin per unit = Sales price per unit - Variable cost per unit = $71 - $44.03 = $26.97

Finally, we can calculate the degree of operating leverage at the financial break-even point using the formula:

DOL = Contribution margin per unit x Break-even point (in units) / [Contribution margin per unit x Break-even point (in units) - Fixed costs - Depreciation]

DOL = $26.97 x 2,687 / [$26.97 x 2,687 - $57,000 - $19,875] = 3.09

Therefore, the degree of operating leverage at the financial break-even level of output is 3.09. The best choice is B.

A Project Has an Estimated Sales Price of $71 Per