A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $67,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500?
A)1.46
B)1.52
C)1.67
D)2.08
E)2.14

Question

Quizplus · Accepted Answer

DOL = 1 + ($36,000/$67,000) = 1.537313Percentage change in Q = (18,500 - 18,000)/18,000 = 2.7778 percentAt 18,500 units, percentage change in OCF = 1.537313 F1F1F1S1F1F1F10 .027778 = 4.2703 percentNew OCF = $67,000 F1F1F1S1F1F1F10 (1 + 0.042703) = $69,861At 18,500 units, DOL = 1 + ($36,000/$69,861) = 1.52

A Proposed Project Has Fixed Costs of $36,000 Per Year