At an output level of 15,400 units, you have calculated that the degree of opera

Question

At an output level of 15,400 units, you have calculated that the degree of operating leverage is 2.00. The operating cash flow is $58,000 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for output levels of 16,400 units and 14,400 units? Please show steps. At an output level of 15,400 units, you have calculated that the degree of operating leverage is 2.00. The operating cash flow is $58,000 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for output levels of 16,400 units and 14,400 units? Please show steps.

Explanation / Answer

Degree of operating leverage = Contribution margin / Operating income

2 =Contribution margin / Operating income

2 = Contribution margin / 58000

Contribution margin = 58000*2 i.e 116000

Fixed Cost = 116000-58000 i.e 58000

Contribution per unit = 116000/15400 i.e 7.5325

1) Output = 16400 units

Contribution = 16400*7.5325 i.e 123532.50

Operating casg flows = 123532.50-58000 i.e 65532.50

Degree of operating leverage = 123532.50/65532.50 i.e 1.8850

2) Output = 14400 units

Contribution = 14400*7.5325 i.e 108468

Fixed cost =58000

Operating Cash flows = 108468-58000 i.e 50468

Degree of operating leverage = 108468/50468 i.e 2.1492

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