A proposed project has fixed costs of $43,000 per year. the operating cash flow at 16,000 units is $89,000. a. ignoring the effect of taxes, what is the degree of operating leverage?
Answer:
Fixed Costs = $43,000
Operating Cash flow at 16,000 units = $89,000
Degree of Operating Leverage = 1 + Fixed Costs / Operating Cash flow
Degree of Operating Leverage = 1 + $43,000 / $89,000
Degree of Operating Leverage = 1.4831
The Degree of Operating Leverage measures how a good deal a employer's operating earnings modifications in response to a change in sales. The DOL ratio assists analysts in determining the impact of any trade in sales on company earnings.
What's the method for Degree of Operating Leverage?
The Degree of Operating Leverage can also be calculated by using subtracting the variable fees of income and dividing that range via sales minus variable expenses and glued costs.
What does Degree of Operating Leverage measure?
The Degree of Operating Leverage (DOL) is a more than one that measures how a good deal the operating profits of a enterprise will alternate in reaction to a exchange in income.
Is a higher Degree of Operating Leverage better?
Generally speak me, excessive running leverage is better than low running leverage, as it permits businesses to earn large income on each incremental sale. Having stated that, organizations with a low Degree of Operating Leverage can also discover it less complicated to earn a profit while handling a lower degree of sales.
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