Question

a suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. assume depreciation is straight-line to zero over the life of the project. sales are projected at 51,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. the tax rate is 21 percent and the required return is 12 percent. ignore taxes. what is the dol at the base-case output level of 51,000 units? group of answer choices2.983.693.463.212.35

Answer 1

The Degree of Operating Leverage (DOL) at the base-case output level of 51,000 units is 3.21, showing the proportionate change in earnings before interest and taxes for a given change in sales.

Step-by-step explanation:

The Degree of Operating Leverage (DOL) at the base-case output level can be calculated using the following formula:

DOL = (Q(P - V)) / (Q(P - V) - F)

Where:

Q is the quantity of units sold,

P is the price per unit,

V is the variable cost per unit, and

F is the fixed costs.

Using the given data:

Q = 51,000 units

P = $47

V = $23

F = $842,900

Substituting these values into the DOL formula, we get:

DOL = (51,000($47 - $23)) / (51,000($47 - $23) - $842,900)

This simplifies to:

DOL = (51,000 * $24) / (51,000 * $24 - $842,900)

Calculating the DOL, we find:

DOL = $1,224,000 / ($1,224,000 - $842,900)

DOL = $1,224,000 / $381,100

DOL = 3.21

Therefore, the Degree of Operating Leverage at the base-case output level of 51,000 units is 3.21.