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

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

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,200,000 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 $800,000 and that variable costs should be $250 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 $650,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $360 per ton. The engineering department estimates you will need an initial net working capital investment of $420,000. You require a return of 15 percent and face a marginal tax rate of 38.

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___________________

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