If we conslder the effect of taxes, then the degree of operating leverage can be written as DOL = 1+ [FC x (1 – Td-TC D]/OCF Consider a project to supply Detrolt with 27,000 tons of machine screws annually for automobile production. You will need an Initlal $4,600,000 Investment In threading equipment to get the project started, the project will last for 5 years. The accounting department estimates that annual fixed costs wll be $1,100,000 and that varlable costs should be $205 per ton; accounting will depreclate the Initlal fixed asset Investment stralght-line to zero over the 5-year project life. It also estimates a salvage value of $475,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $308 per ton. The engineering department estimates you will need an Initlal net working capital Investment of $440,000. You requlre a return of 12 percent and face a tax rate of 23.
If we conslder the effect of taxes, then the degree of operating leverage can be written as DOL = 1+ [FC x (1 – Td-TC D]/OCF Consider a project to supply Detrolt with 27,000 tons of machine screws annually for automobile production. You will need an Initlal $4,600,000 Investment In threading equipment to get the project started, the project will last for 5 years. The accounting department estimates that annual fixed costs wll be $1,100,000 and that varlable costs should be $205 per ton; accounting will depreclate the Initlal fixed asset Investment stralght-line to zero over the 5-year project life. It also estimates a salvage value of $475,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $308 per ton. The engineering department estimates you will need an Initlal net working capital Investment of $440,000. You requlre a return of 12 percent and face a tax rate of 23.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![If we consider the effect of taxes, then the degree of operating leverage can be written
as:
DOL =1+ [FC x (1– Td-TCx D]/OCF
Consider a project to supply Detrolt with 27,000 tons of machine screws annually for
automobile production. You will need an Initlal $4,600,000 Investment In threading
equipment to get the project started; the project wlll last for 5 years. The accounting
department estimates that annual fixed costs will be $1,100,000 and that varlable costs
should be $205 per ton; accounting will depreclate the Initlal fixed asset Investment
stralght-line to zero over the 5-year project life. It also estimates a salvage value of
$475,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $308 per ton. The engineerIng
department estimates you will need an Initlal net working capital Investment of
$440,000. You requlre a return of 12 percent and face a tax rate of 23.
a. What Is the percentage change In OCF If the units sold changes to 28,000? (Do not
round Intermediete calculetions and enter your answer as a percent rounded to 4
declmal places, e.g., 32.1616.)
b. What Is the DOL at the base-case level of output? (Do not round Intermedlate
calculatlons and round your answer to 4 decimal places, e.g., 32.1616.)
a.
Change in OCF
b.
DOL](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F96367b51-7a35-48ec-b113-14c01f601e4a%2Fd7c20f6c-233d-420d-a711-415942f8c62f%2F78u11xq_processed.jpeg&w=3840&q=75)
Transcribed Image Text:If we consider the effect of taxes, then the degree of operating leverage can be written
as:
DOL =1+ [FC x (1– Td-TCx D]/OCF
Consider a project to supply Detrolt with 27,000 tons of machine screws annually for
automobile production. You will need an Initlal $4,600,000 Investment In threading
equipment to get the project started; the project wlll last for 5 years. The accounting
department estimates that annual fixed costs will be $1,100,000 and that varlable costs
should be $205 per ton; accounting will depreclate the Initlal fixed asset Investment
stralght-line to zero over the 5-year project life. It also estimates a salvage value of
$475,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $308 per ton. The engineerIng
department estimates you will need an Initlal net working capital Investment of
$440,000. You requlre a return of 12 percent and face a tax rate of 23.
a. What Is the percentage change In OCF If the units sold changes to 28,000? (Do not
round Intermediete calculetions and enter your answer as a percent rounded to 4
declmal places, e.g., 32.1616.)
b. What Is the DOL at the base-case level of output? (Do not round Intermedlate
calculatlons and round your answer to 4 decimal places, e.g., 32.1616.)
a.
Change in OCF
b.
DOL
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