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Operating Leverage for the Electric Scooter Project

Operating leverage is often measured as the percentage increase in pretax profits after depreciation for a 1% increase in sales.

a. Calculate the operating leverage for the electric scooter project assuming unit sales are 100,000 (see Section 10 - 2).

b. Now show that this figure is equal to 1 (fixed costs including depreciation divided by pretax profits).

c. Would operating leverage be higher or lower if sales were 200,000 scooters?

Year 0 Years 1 - 10
Investment 15
Revenue 37.5
Variable cost 30
Fixed cost 3
Depreciation 1.5
Pretax profit 3 Tax 1.5
Net profit 1.5
Operating cash flow 3
Net cash flow -15 3.

Solution Summary

The solution discusses operating leverage for the electric scooter project.