At an output level of 16,000 units, you have calculated that the degree of opera

Question

At an output level of 16,000 units, you have calculated that the degree of operating leverage is 1.6. The operating cash flow is $32,000 in this case.

Ignoring the effect of taxes, what are fixed costs? (Do not round your intermediate calculations.)

What will the operating cash flow be if output rises to 17,000 units? (Do not round your intermediate calculations.)

What will the operating cash flow be if output falls to 15,000 units? (

At an output level of 16,000 units, you have calculated that the degree of operating leverage is 1.6. The operating cash flow is $32,000 in this case.

Explanation / Answer

a. Fixed Costs $      19,200 Working: i. Degree of operating leverage = Contribution Margin / Net Operating Income or, 1.6 = Contribution Margin / 32000 or, Contribution Margin = 32000*1.6 or, Contribution Margin = $       51,200 ii. Contribution Margin $       51,200 Less:Operaing Income $       32,000 Fixed Costs $       19,200 b. Operating cash flow $       35,200 Working: Change in sales = (17000-16000)/16000 = 6.25% Change in operating cash flow = Change in sales x Operating Leverage = 6.25% x 1.6 = 10.00% Existing Operating cash flows $       32,000 Change in operating cash flow $         3,200 Revised Operating cash flow $       35,200 c. Operating cash flow $       28,800 Working: Change in sales = (15000-16000)/16000 = -6.25% Change in operating cash flow = Change in sales x Operating Leverage = -6.25% x 1.6 = -10.00% Existing Operating cash flows $       32,000 Change in operating cash flow $        -3,200 Revised Operating cash flow $       28,800

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