Question

At an output level of 45,000 units, you calculate that the degree of operating leverage is 2.79. Fixed costs are $175,000.

a. What is the operating cash flow at 43,000 units? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

b. What is the degree of operating leverage? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

Workings for a&b questions:

Calculation of Contribution:

Operating leverage formula :-

Operating leverage= contribution/EBIT

2.79= sales-variable cost/sales - variable cost-fixes cost

2.79(sales-variable cost-175,000)= sales-variable

2.79 sales- 2.79 variable cost-488,250 =sales-variable cost

1.79sales-1.79 variable cost= 488,250

1.79(sales-variable)= 488,250

1.79contribution = 488,250

Contribution= 488,250/1.79

Contribution=272,765.363

Contribution at 45,000 units is 272,765.363

Contribution at 43,000 = 43,000×272,765.363/45,000 = =260,642.459

Assumed that,Fixed cost doesn't change with units produced.

a) calculation of operating cash flows at 43,000 units:

operating cash flows = contribution- fixed cost

= 260,642.459 - 175,000

= 85,642.459.

b) calculation of degree of operating leverage:-

Operating leverage = contribution/ EBIT

= Contribution/ (contribution - fixed cost

= 260,642.459/85,642.459

=3.043