Question

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:
A. Lowering the degree of operating leverage.
B. Lowering the contribution margin per unit.
C. Increasing the initial cash outlay.
D. Increasing the fixed costs per unit.
E. Lowering the operating cash flow.

Answer 1

Answer: A. Lowering the degree of operating leverage.

Explanation:

The degree of operating leverage measure how much the earnings from a project will change as a result of sales.

If you are worried about the cash flow forecasts, it would be best to lower the operating leverage so as to reduce the forecasting error associated with the project. If the operating leverage is high then a small change in sales could impact income in a relatively huge way. By reducing the DOL, the cashflow from the project is easier to forecast and therefore more reliable.