A proposed project has fixed costs of $49,000 per year. The operating cash flow

ID: 2615441 • Letter: A

Question

A proposed project has fixed costs of $49,000 per year. The operating cash flow at 12,000 units is $86,000.

Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round your intermediate calculations.)

If units sold rise from 12,000 to 12,300, what will be the increase in operating cash flow? (Do not round your intermediate calculations.)

What is the new degree of operating leverage? (Do not round your intermediate calculations.)

A proposed project has fixed costs of $49,000 per year. The operating cash flow at 12,000 units is $86,000.

(a)

Correct option > 1.5698

Working:

Degree of operating leverage = (Operating cash flow + Fixed cost) / Operating cash flow

Degree of operating leverage = (86000 + 49000) / 86000

Degree of operating leverage = 1.5698

(b)

Correct option is > 3.92%

First, we have to calculate per unit contribution for 12000 units.

Contribution per unit = (Operating cash flow for 12000 units + Fixed cost)/ 12000 units

Contribution per unit = (86000+49000) / 12000

Contribution per unit = 135000 / 12000 = $11.25

Now, we can calculate operating cash flow:

Note: Per unit contribution and fixed cost will same for both 12000 units and 12300 units

Operating cash flow = Contribution per unit x 12300 + Fixed cost

Operating cash flow = 11.25 x 12300 – 49000

Operating cash flow = $89,375 (at 12300 units)

Now, we can calculate % change in operating cash flow:

Operating cash flow change in percentage = (Operating cash flow at 12300 – Operating cash flow at 12000 units) / Operating cash flow at 12000 units

Operating cash flow change in percentage = (89375 – 86000) / 86000

Operating cash flow change in percentage = 3.92%

(c)

Correct option is > 1.5483

New Degree of operating leverage = (Operating cash flow + Fixed cost) / Operating cash flow

New Degree of operating leverage = (89375 + 49000) / 89375

New Degree of operating leverage = 1.5483

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