At an output level of 15,200 units, you have calculated that the degree of opera

Question

At an output level of 15,200 units, you have calculated that the degree of operating leverage is 2.60. The operating cash flow is $57,500 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for 16,200 units and 14,200 units? (Round your answers to 2 decimal places. (e.g., 32.16))

At an output level of 15,200 units, you have calculated that the degree of operating leverage is 2.60. The operating cash flow is $57,500 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for 16,200 units and 14,200 units? (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

- DOL(Degree of Operating Leverage) = Contribution / EBIT

- Contribution = DOL x EBIT(Operating Cash Flows)

Contribution at 15,200 uniits = 2.60 x 57,500 = $149,500

Contribution per unit= 149,500 / 15,200 = $9.84 per unit

- Contribution at 14,200 units = $139,664.47

New EBIT = 57,500 - (149,500 - 139,664.47) = $47,664.47

DOL = 139,664.47 / 47,664.47 = 2.93

- Contribution at 16,200 units = $159,335.53

New EBIT = 57,500 + (159,335.53 - 149,500) = $67,335.53

DOL = 159,335.53 / 67,335.53 = 2.37

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