If we consider the effect of taxes, then the degree of operating leverage can be written as:

DOL = 1 + [FC (1 T) T D]/OCF

Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $3,600,000 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 $850,000 and that variable costs should be $185 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $500,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $280 per ton. The engineering department estimates you will need an initial net working capital investment of $360,000. You require a 13 percent return and face a marginal tax rate of 38 percent on this project at the base-case output level of 25,000 units. For sensitivity, use 26,000 units.

A. What is the percentage change in OCF for a percent change in quantity sold?

B. What is the DOL at the base-case level of output?