Calculating operating leverage of a project
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A project has fixed costs of $1,000 per year, depreciation charges of $500 a year, revenue of $6,000 a year and variable costs equal to two-thirds of revenues.
a. If sales increase by 5 percent, what will be the increase in pretax profits?
b. What is the degree of operating leverage of this project?
c. Confirm that the percentage change in profits equals DOL times the percentage change in sales.
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Solution describes the steps for calculationg degree of operating leverage of a project.
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Solution:
Revenue=S = $6000
Fixed Costs =FC= $1000
Variable Costs =VC= 6000*(2/3) = $4000
EBIT = Revenue-Fixed Cost-Variable Cost-Depreciation
=6000-1000-4000-500
=$500
a) If sales increase by 5 percent, what ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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