Question

At an output level of 16,000 units, you have calculated that the degree of operating leverage is 1.6. The operating cash flow is $32,000 in this case.

  

Required:

(a)	Ignoring the effect of taxes, what are fixed costs? (Do not round your intermediate calculations.)
	(Click to select)$21,500$26,000$19,200$22,900$18,550

  

(b)	What will the operating cash flow be if output rises to 17,000 units? (Do not round your intermediate calculations.)
	(Click to select)$43,000$39,500$37,800$34,250$35,200

  

(c)	What will the operating cash flow be if output falls to 15,000 units? (

Answer 1

a.	Fixed Costs		$      19,200
Working:
i.	Degree of operating leverage			=	Contribution Margin / Net Operating Income
	or,	1.6		=	Contribution Margin / 32000
	or,	Contribution Margin		=	32000*1.6
	or,	Contribution Margin		=	$       51,200
ii.	Contribution Margin				$       51,200
	Less:Operaing Income				$       32,000
	Fixed Costs				$       19,200
b.	Operating cash flow				$       35,200
Working:
	Change in sales		=	(17000-16000)/16000		=	6.25%
	Change in operating cash flow			=	Change in sales x Operating Leverage
				=	6.25%	x	1.6
				=	10.00%
	Existing Operating cash flows				$       32,000
	Change in operating cash flow				$         3,200
	Revised Operating cash flow				$       35,200
c.	Operating cash flow				$       28,800
Working:
	Change in sales		=	(15000-16000)/16000		=	-6.25%
	Change in operating cash flow			=	Change in sales x Operating Leverage
				=	-6.25%	x	1.6
				=	-10.00%
	Existing Operating cash flows				$       32,000
	Change in operating cash flow				$        -3,200
	Revised Operating cash flow				$       28,800