A project has fixed costs of $2,400 per year, depreciation charges of $300 a year, annual...
A project has fixed costs of $2,400 per year, depreciation charges of $300 a year, annual revenue of $21,600 and variable costs equal to two-thirds of revenues.
A.) if sales increase by 19%, what will be the percentage increase in pretax profits?
B.) what is the degree of operating leverage of this project?
Homework Answers
Variable cost = $21,600 X 2/3 = $14,400
Total fixed cost = $2,400 + $300 = $2,700
Contribution margin = $21,600 - $14,400 = $7,200
Operating income = $7,200 - $2,700 = $4,500
B) Degree of operating leverage = $7,200 / $4,500 = 1.60
A) Percentage increase in pretax profit = 19% X 1.6 = 30.40%
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