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

Company A:
Degree of operating leverage = % change in operating income/% change in sales = 15%/10% = 1.5
In response to a 15% increase sales, operating income will increase by 22.5% [=1.5 × 15%]

Company B:
Operating margin = ($2,000,000 × 0.4 $400,000) ÷ $2,000,000 = 20%
Degree of operating leverage = contribution margin percentage/operating margin = $40% ÷ 20% = 2%

Increase in operating income in response to 15% increase in sales = 2 × 15% = 30%

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