Question

A project has fixed costs of $5,000 per year, depreciation charges of $2,000 per year, revenue of $30,000 per year, and variable costs equal to 70% of revenues. What is the degree of operating leverage for this project

Answer 1

The degree of operating leverage for this project is 450%

Step-by-step explanation:

Degree of Operational Leverage measures the Company`s Business Risk.

It shows the Variation of Sales and Costs due to the company`s Cost Structure

Degree of Operational Leverage is calculated as follows:

=(Sales - Variable Costs)/ (Sales - Variable Costs - Fixed Costs)

=($30,000 - $21,000)/( $30,000 - $21,000 - $7,000)

=$9,000/ $2,000

= 450%