Question

The Crane Co. is going to take on a project that is expected to increase its EBIT by $85,000, its fixed cost cash expenditures by $128,000, and its depreciation and amortization by $75,000 next year. If the project yields an additional 10 percent in revenue, what percentage increase in the project’s EBIT will result from the additional revenue? (Round answer to 1 decimal place, e.g. 15.2.)

Answer 1

EBIT = $85,000
Fixed Cost = $128,000
Depreciation and Amortization = $75,000

Operating Cash Flow = EBIT + Depreciation and Amortization
Operating Cash Flow = $85,000 + $75,000
Operating Cash Flow = $160,000

Accounting Degree of Operating Leverage = 1 + Fixed Cost / Operating Cash Flow
Accounting Degree of Operating Leverage = 1 + $128,000 / $160,000
Accounting Degree of Operating Leverage = 1 + 0.80
Accounting Degree of Operating Leverage = 1.80

Accounting Degree of Operating Leverage = % Increase in EBIT / % Increase in Revenue
1.80 = % Increase in EBIT / 10%
% Increase in EBIT = 18%

So, project’s EBIT will increase by 18% due to 10% increase in revenue.