Question

Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $22; fixed costs = $170,000; quantity sold = 78,000 units; tax rate = 32 percent.

What is the degree of operating leverage at the given level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage

What is the degree of operating leverage at the accounting break-even level of output? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) Degree of operating leverage

Answer 1

Accounting break even point = Fixed cost /(Price -variable cost)

             = 170000/(32-22)

          = 170000/10

          = 17000 units

	AT 78000 Units	At 17000 units
sales	2496000    [78000*32]	544000     [17000*32]
less:variable cost	(1716000)   [78000*22)	374000      [17000*22)
conribution margin	780000	170000
less:fixed cost	(170000)	(170000)
Income before tax	610000	0
less:Tax	(195200)    [610000*.32)	0
Net income	414800	0

1)Degree of operating leverage = Contribution margin /net income

    =780000/414800

    = 1.8804

2)Degree of operating leverage= 170000/0

since the denominator is 0 ,value cannot be determined .(infinite)