Question

A proposed project has fixed costs of $ 43,000 per year. The operating cash flow at 8,000 units is $ 79,000. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise from 8,000 to 8,500, what will be the increase in operating cash flow? What is the new degree of operating leverage?

Answer 1

The increase in operating cash flow is $4937.50

The new degree of operating leverage is 1.5122

Step-by-step explanation:

OCF at 8,000 units = $79,000

OCF after increase at 8,500 units is ?

So, we compute to know the increase in operating cash flow.

==>> 8500/8000 * 79000 = 83937.5

==>> The increase in operating cash flow is 83937.5 – 79000 = $4937.50

Now, we look at What is the new degree of operating leverage

Fixed Cost = 43,000

OCF at 8,500 units = 83937.5

DOL = 1 + FC / OCF

DOL = 1 + 43,000 / 83937.5

DOL = 1.5122

Thus, the new degree of operating leverage is 1.5122