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1 year ago

If we consider the effect of taxes, then the degree of operating leverage can be written as:

Business

1 answer:

andreev551 [17]1 year ago

8 0

Answer:

a) 0% change

b) 0.393

Explanation:

Degree of operating leverage: DOL = 1 + [FC × (1 – TC) – TC × D]/OCF

Machine screws to be supplied = 28,000 tons

Initial investment in threading equipment = $4,800,000

project period = 5 years

annual fixed cost = $1,150,000

variable cost = $215 per ton = 215 * 28,000 = $6,020,000

salvage value of project after dismantling costs = $525,000

selling price of project = $320 per ton = $8,960,000

initial networking capital investment = $460,000

Return = 14%

tax rate = 25% = 0.25

<u>a) Determine the percentage change in OCF if the units sold changes to 28,000</u>

Given : DOL = 1 + [FC × (1 – TC) – TC × D]/OCF

OCF = [(contribution * number of units sold) - fixed costs] * ( 1-tax) + depreciation*tax ----------- ( 1 )

contribution = sales price - variable cost = 320 - 215 = $105

number of units sold = 28,000

depreciation = 4,800,000 / 5 = $960,000

back to equation 1

OCF = [[ ( 105 *28,000) - 1,150,000 ] * ( 1 - 0.25 ) + 960,000 * 0.25 ]

= $1,582,500

Hence the percentage change = 0% ( Initial units to be sold as given in the question = 28,000 as well )

b) Determine the DOL at the base-case level of output

DOL = 1 + [FC × (1 – TC) – TC × D] / OCF

= 1 + [ 1,150,000 * ( 1 - 0.25 ) - 0.25 * 960,000 ] / 1,582,500

= 622501 / 1,582,500 = 0.393

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2 years ago

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