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Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%. i) What is the degree of operating leverage for this project?  ii) If sales fall by 10%, what is the impact on OCF?

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%. i) What is the degree of operating leverage for this project?  ii) If sales fall by 10%, what is the impact on OCF?

Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
Chapter26: Capital Budgeting (capbud)
Section: Chapter Questions
Problem 5R
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Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight- line to zero over the 10-year life of the project. Projected total contribution margin is $1,121,000 and the anticipated annual EBIT is $222,000. Assume that the corporate tax rate (τ) is 35%.

i) What is the degree of operating leverage for this project? 

ii) If sales fall by 10%, what is the impact on OCF? 

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