If we consider the effect of taxes, then the degree of operating leverage can be written as: DOL = 1 + [FC times (1 – T_C) – T_C times D]/OCF Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,600,000 investment in threading equipment to get the project started: the project will last for three years. The accounting department estimates that annual fixed costs will be $750,000 and that variable costs should be $420 per ton: accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $550 per ton. The engineering department estimates you will need an initial net working capital investment of $460,000. You require a return of 17 percent and face a marginal tax rate of 30. a. What is the percentage change in OCF if the units sold changes to 31,000? (Do not round intermediate calculations. Enter your answer as a percent rounded to 4 decimal places, e.g., 32.1616.) Percentage change in OCF % b. What is the DOL at the base-case level of output? (Do not round intermediate calculations and round your final answer to 4 decimal places, e g., 32.1616.) DOL
