Question

At an output level of 62,000 units, you calculate that the degree of operating leverage is 3.70. Suppose fixed costs are $280,000. What is the operating cash flow at 56,000 units? (Do not round intermediate calculations and round your final answer to the nearest whole number, e.g., 32.) Operating cash flow $ What is the new degree of operating leverage? (Do not round intermediate calculations and round your final answer to 3 decimal places, e.g., 32.161.) Degree of operating leverage

Answer 1

operating cash flow = EBIT,

Operating leverage = Contribution / EBIT or

% change in EBIT / %change in sales= 3.7,

EBIT = Contribution - fixed cost.

Let contribution per unit = y. then total contribution = 62000y,

operating leverage = 62000y / (62000y - 280000) = 3.7,

62000y = (62000y - 280000) X 3.7,

62000y = 229,400y - 1,036,000,

229,400y - 62000y = 1,036,000,

167400y = 1,036,000,

y = 1,036,000/ 167400,

y = 6.18876941457587,

So total contribution = 6.18876941457587 X 62,000 = $383,703.703703704,

and EBIT = $383,703.703703704-$280,000,

EBIT = 103703.703703704

If sales units reduced to 56000 units, %change in sales = (62000-56000) / 62000,

0.0967741935483871 or 9.67741935483871%,

Apply values in formula of Operating Leverage = % change in EBIT / %change in sales,

% change in EBIT / 9.67741935483871% = 3.7,

% change in EBIT = 9.67741935483871% X 3.7 ,

% change in EBIT = 35.8064516129032%,

So the new EBIT = Old EBIT - % change in EBIT,

the new EBIT = $103703.703703704 - (35.8064516129032% X $103703.703703704),

EBIT = $103703.703703704 - $37,132.6164874552 = $66,571.0872162485.

rounded to the nearest whole number = $66,571

Another way is new units multiplied with Contribution per unit then deduct fixed cost,

New units = 56,000,

Cotribution per unit = $6.18876941457587,

New contribution = 56,000 X $6.18876941457587, = $346,571.087216249,

New EBIT = $346,571.087216249 - $280,000 = $66,571.0872162487

rounded to the nearest whole number = $66,571

and new Operating Leverage = $346,571.087216249 / $66,571.0872162487,

= 5.20603015075375,

Degree of operating leverage (rounded to 3 decimal places) = 5.206.

Thank you....