A proposed project has fixed costs of $36,000 per year.The operating cash flow at 18,000 units is $58,000.What will be the new degree of operating leverage if the number of units sold rises to 18,500?
A)1.46
B)1.59
C)1.67
D)2.08
E)2.14

Question

Quizplus · Accepted Answer

DOL = 1 + ($36,000/$58,000) = 1.62068966Percentage change in Q = (18,500 - 18,000)/18,000 = 2.7778 percentAt 18,500 units, percentage change in OCF = 1.62068966 × .027778 = 4.501916 percentNew OCF = $58,000 × (1 + 0.04501916) = $60,611.11At 18,500 units, DOL = 1 + ($36,000/$60,611.11) = 1.59

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