A project has fixed costs of $5,000 per year, depreciation charges of $2,000 per year, revenue of $30,000 per year, and variable costs equal to 70% of revenues. What is the degree of operating leverage for this project

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Business

Adkins

26 December, 18:19

A project has fixed costs of $5,000 per year, depreciation charges of $2,000 per year, revenue of $30,000 per year, and variable costs equal to 70% of revenues. What is the degree of operating leverage for this project

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Kenneth Fuller · Answer 1

The degree of operating leverage for this project is 450%

Explanation:

Degree of Operational Leverage measures the Company's Business Risk.

It shows the Variation of Sales and Costs due to the company's Cost Structure

Degree of Operational Leverage is calculated as follows:

= (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs)

= ($30,000 - $21,000) / ($30,000 - $21,000 - $7,000)

=$9,000 / $2,000

= 450%