Question

Use the following information to answer the question below:

a project with fixed costs of $240,000 and operating cash flow of $360,000 was expected to sell 12,000 units. The final results showed they sold about 13,200 units instead.

what is the degree of operating leverage?

what is the percentage change in quantity?

what is the percentage change in operating cash flow?

What will the OCF be at the higher (actual) quantity?

Answer 1

Compute the degree of operating leverage (DOL), using the equation as shown below:

DOL = (Operating cash flows + Fixed cost)/ Operating cash flows

         = ($360,000 + $240,000)/ $360,000

         = $600,000/ $360,000

         = 1.66666666666

Hence, the DOL is 1.66666666666.

Compute the percentage change in quantity, using the equation as shown below:

Percentage change = (Actual units – Expected Units)/ Expected units

                               = (13,200 - $12,000)/ 12,000

                               = 1,200/ 12,000

Hence, the percentage change in quantity is 10%.

Compute the contribution per unit, using the equation as shown below:

Contribution per unit = (Fixed cost + Operating cash flows)/ Estimated units

                                   = ($240,000 + $360,000)/ 12,000 units

                                   = $600,000/ 12,000 units

                                   = $50 per unit

Hence, the contribution is $50 per unit.

Compute the actual operating cash flows, using the equation as shown below:

Actual operating cash flows = (Actual units*Contribution per unit) – Fixed cost

                                              = (13,200 units*$50) - $240,000

                                              = $660,000 - $240,000

                                              = $420,000

Hence, the actual operating cash flows are $420,000.

Compute the percentage change in operating cash flows, using the equation as shown below:

Percentage change = (Actual operating cash flows – Estimated operating cash flows)/ Estimated operating cash flows

                                 = ($420,000 - $360,000)/ $360,000

                                 = $60,000/ $360,000

                                 = 16.6666666666%

Hence, the percentage change in operating cash flows is 16.6666666666%.

Compute the actual operating cash flows, using the equation as shown below:

Actual operating cash flows = (Actual units*Contribution per unit) – Fixed cost

                                              = (13,200 units*$50) - $240,000

                                              = $660,000 - $240,000

                                              = $420,000

Hence, the actual operating cash flows are $420,000.