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

- Degree of Operating Leverage = Contribution / EBIT

- Thus, from above, Contribution = DOL x EBIT(Operating Cash Flows)

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

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

- Contribution at the level of 14,200 units = $139,664.47

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

DOL = 139,664.47 / 47,664.47 = 2.93

- Contribution at at the level of 16,200 units = $159,335.53

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

DOL = 159,335.53 / 67,335.53 = 2.37

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