At an output level of 18,000 units, you have calculated that the degree of opera

Question

At an output level of 18,000 units, you have calculated that the degree of operating leverage is 2.10. The operating cash flow is $46,500 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 19,000 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 17,000 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

1. Degree of operating leverage can be calculated as follows

Degree of operating leverage = (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs)

Degree of operating leverage = (Sales - Variable Costs) / OCF

2.1 = (Sales - Variable Costs) / 46500

(Sales - Variable Costs) = 97650

Since OCF = (Sales - Variable Costs - Fixed Costs)

Fixed Costs = (Sales - Variable Costs - OCF) = 97650 - 46500 = 51150

Lets assume sales price is S and Variable cost is VC

So 18000*(S-VC) = 97650

S - VC = 5.43

2. OCF when units = 19000

OCF = Sales - Variable costs - fixed costs

= 19000 (S-VC) - 51150 = 19000 * 5.43 - 51150 = 51925

3. OCF when units = 17000

OCF = Sales - Variable costs - fixed costs

= 17000 (S-VC) - 51150 = 17000 * 5.43 - 51150 = 41075

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