Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $735,751 and the anticipated annual operating cash flow is $221,831. What is the degree of operating leverage for this project?

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $735,751 and the anticipated annual operating cash flow is $221,831. What is the degree of operating leverage for this project?

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 51P: Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new...

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Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%. i) What is the degree of operating leverage for this project? ii) If sales fall by 10%, what is the impact on OCF?
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