Chp 11, #2 At an output level of 17,000 units, you have calculated that the degr

Question

Chp 11, #2

At an output level of 17,000 units, you have calculated that the degree of operating leverage is 2.00. The operating cash flow is $33,800 in this case. Ignoring the effect of taxes, what are fixed costs? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.)

What will the operating cash flow be if output rises to 18,000 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

What will the operating cash flow be if output falls to 16,000 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

1)Degree of operating leverage =Contribution margin /operating margin

                    2 = Contribution margin / 33800

          contribution margin = 2* 33800 = 67600

Fixed cost = contribution margin - operating margin

                   = 67600-33800

                     = $ 33800

2) contribution per unit at 17000 unit = 67600 /17000 = 3.97647

Operating cash flow =( units *contribution per unit )- fixed cost

                             = (18000*3.97647 ) - 33800

                             = 71576.46-33800

                              = 37776.46

3)

Operating cash flow =( units *contribution per unit )- fixed cost

                             = (16000*3.97647 ) - 33800

                             = 63623.52-33800

                              = 29823.52

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