At an output level of 6,000 units, you have calculated that the degree of operat

Question

At an output level of 6,000 units, you have calculated that the degree of operating leverage is 2. The operating cash flow is $13,800 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 8,000 units? (Do not round your intermediate calculations.)

What will the operating cash flow be if output falls to 4,000 units? (Do not round your intermediate calculations.)

At an output level of 6,000 units, you have calculated that the degree of operating leverage is 2. The operating cash flow is $13,800 in this case.

Explanation / Answer

degree of operating leverage , d = 2

operating cash flow , c = $13,800

output level , q1 = 6000

a)

d = contribution margin/c

contribution margin = d*c = 2*13,800 = 27,600

c = contribution margin - fixed cost

fixed cost = contribution margin - c = 27,600 - 13,800 = 13800

b)

new output , n = 8000

% change in output , q2 = (n-q1)/q1 = (8000-6000)/6000 = 2000/6000 = 0.3333

d = % change in operating cash flow/q2

% change in operating cash flow = d*q2 = 2*0.3333 = 0.6666

new operating cash flow = p1

% change in operating cash flow = (p1-c)/c

(p1-c)/c = 0.6666

p1 = (0.6666*c) + c = (0.6666*13800)+13800 = $23000

operating cash flow = p1 = $23000

c)

new output , n = 4000

% change in output , q2 = (n-q1)/q1 = (4000-6000)/6000 = -2000/6000 =- 0.3333

d = % change in operating cash flow/q2

% change in operating cash flow = d*q2 = 2*-0.3333 = -0.6666

new operating cash flow = p1

% change in operating cash flow = (p1-c)/c

(p1-c)/c = -0.6666

p1 = (-0.6666*c) + c = (-0.6666*13800)+13800 = $4600

operating cash flow = p1 = $4600

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