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If we consider the effect of taxes, then the degree of operating leverage can be written as: DOL = 1 + [ FC times
If we consider the effect of taxes, then the degree of operating leverage can be written as:
DOL FC times TC TC times DOCF
Consider a project to supply Detroit with tons of machine screws annually for automobile production. You will need an initial $ million investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $ and that variable costs should be $ per ton; accounting will depreciate the initial fixed asset investment straightline to zero over the fiveyear project life. It also estimates a salvage value of $ after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $ per ton. The engineering department estimates you will need an initial net working capital investment of $ The tax rate is percent.
a What is the DOL at the basecase level of output? Do not round intermediate calculations and round your answer to decimal places, eg
b
What is the percentage change in OCF if sales increase to tons? Do not round intermediate calculations and enter your answer as a percent rounded to decimal places, eg
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