Modern Artifacts can produce keepsakes that will be sold for $90 each. Nondepreciating fixed costs are $1,300 per year, and variable costs are $50 per unit. The initial investment of $3,900 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%. a. What is the degree of operating leverage of Modern Artifacts when sales are $4,950? b. What is the degree of operating leverage when sales are $9,630? c. Why is operating leverage different at these two levels of sales?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
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Modern Artifacts can produce keepsakes that will be sold for $90
each. Nondepreciating fixed costs are $1,300 per year, and
variable costs are $50 per unit. The initial investment of $3,900
will be depreciated straight-line over its useful life of 5 years to a
final value of zero, and the discount rate is 12%.
a. What is the degree of operating leverage of Modern Artifacts
when sales are $4,950?
b. What is the degree of operating leverage when sales are
$9,630?
c. Why is operating leverage different at these two levels of
sales?
Transcribed Image Text:Modern Artifacts can produce keepsakes that will be sold for $90 each. Nondepreciating fixed costs are $1,300 per year, and variable costs are $50 per unit. The initial investment of $3,900 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%. a. What is the degree of operating leverage of Modern Artifacts when sales are $4,950? b. What is the degree of operating leverage when sales are $9,630? c. Why is operating leverage different at these two levels of sales?
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