Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent. What is the degree of operating leverage if the contribution margin per unit is $47?    A.  0.38 B.  0.57 C.  1.75 D.  2.10 E.  2.65 DOL = 0.053/0.02 = 2.65

87.

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 12-year life of the project. Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000. What is the degree of operating leverage for this project?    A.  3.78 B.  3.92 C.  4.19 D.  4.27 E.  4.53 Degree of operating leverage = 1 + ($769,000/$241,000) = 4.19

88.

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent. Due to the current state of the economy, you expect sales to decrease by 7 percent next year. What change should you expect in the operating cash flows next year given your sales prediction?    A.  19.60 percent decrease B.  16.03 percent decrease C.  13.46 percent decrease D.  5.60 percent decrease E.  2.74 percent decrease Percentage change in OCF = 2.8 × (-0.07) = -0.196 = 19.60 percent decrease

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project

52.

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could:    A.  lower the degree of operating leverage. B.  lower the contribution margin per unit. C.  increase the initial cash outlay. D.  increase the fixed costs per unit while lowering the contribution margin per unit. E.  lower the operating cash flow of the project. Refer to section 11.5

53.

Which one of the following characteristics best describes a project that has a low degree of operating leverage?    A.  high variable costs relative to the fixed costs B.  relatively high initial cash outlay C.  an OCF that is highly sensitive to the sales quantity D.  high level of forecasting risk E.  a high depreciation expense Refer to section 11.5

54.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?    A.  hiring temporary workers from an employment agency rather than hiring part-time production employees B.  subcontracting portions of the project rather than purchasing new equipment to do all the work in-house C.  leasing equipment on a long-term basis rather than buying equipment D.  lowering the projected selling price per unit E.  changing the proposed labor-intensive production method to a more capital intensive method Refer to section 11.5

55.	The degree of operating leverage is equal to:    A.  the percentage change in quantity divided by the percentage change in OCF. B.  the percentage change in sales divided by the percentage change in OCF. C.  1 + FC/OCF. D.  1 + VC/OCF. E.  1 - (FC + VC)/OCF. Refer to section 11.5