Any help solving the following problem is welcomed - formulas, web
sites, etc.

A project has fixed costs of $1,000 per year, depreciation charges of
$500 a year, revenue of $6,000 a year, and
variable costs equal to two-thirds of revenues.						
Enter formulas to solve this problem.					
					
a. If sales increase by 5 percent, what will be the increase in pretax
profits?
					
	Before	After			
Revenue		FORMULA			
Variable costs	0 	0 			
Fixed costs	1,000 				
Depreciation	500 				
Pretax profit	($1,500)	$0 			
					
b. What is the degree of operating leverage of this project?					
					
Degree Operating Leverage		FORMULA			
					
c. Confirm that the percentage change in profits equals DOL times the
percentage change in sales.
					
Percentage change in profits		-100%			
DOL x % change in sales		0%

Hi boobee!!

a. If sales increase by 5 percent, what will be the increase in pretax
profits?

EBIT is a measure of a company's earning power from ongoing
operations, equal to earnings before deduction of interest payments
and income taxes, also called operating profit or operating income.
The change of EBIT is what you want to know in this case:

EBIT  = Revenues - Fixed costs - Depreciation - Variable costs
EBIT0 = $6000 - $1000 - $500 - (2/3*$6000) = $500
EBIT1 = 1.05*$6000 - $1000 - $500 - (2/3*1.05*$6000) = $600

The increase in Pretax profit (change in EBIT) is:
EBIT1 - EBIT0 = $600 - $500 = $100


b. What is the degree of operating leverage of this project?

Operating leverage measures the effect of fixed costs on the firm, and
that the degree of operating leverage (DOL) equals:
 
       % change in EBIT        
DOL = --------------------     [eq 1] 
      % change in Revenues      
 
% change in EBIT = (change in EBIT / EBIT0)*100 = (100 / 500)*100 =
20%
This results in: 
 
DOL = 20 / 5 = 4

Another DOLīs formula is:

DOL = (Sales or Revenues - Variable costs) / EBIT         [eq 1a]
 

c. Confirm that the percentage change in profits equals DOL times the
percentage change in sales.

This conclusion follows from the [eq 1]:

% change in EBIT = DOL * % change in revenues  

20% = 4 * 5%


Hope this helps. If you need a clarification , please post a request
of it.

Regards.
livioflores-ga