Question

At an output level of 84,000 units, you calculate that the degree of operating leverage is 1.80. Suppose fixed costs are $180,000. a. What is the operating cash flow at 78,000 units? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the new degree of operating leverage? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161

Answer 1

The operating cash flow is $196,071 and the new degree of operating leverage is 1.918

Step-by-step explanation:

a. The computation of operating cash flow is shown below:

By using the information, first we have to calculate the contribution amount.

We know that the operating leverage equals to

Operating leverage = Contribution ÷ EBIT

And, Contribution = Fixed cost + EBIT

So,

1.80 = Fixed cost + EBIT ÷ EBIT

1.80 EBIT - EBIT = Fixed cost

0.80 EBIT = $180,000

So, EBIT = $180,000 ÷ 0.80 = $225,000

And, the contribution = $180,000 + $225,000 = $405,000

Contribution is calculated for 84,000 units but we have to compute for 78,000 units

So, contribution for 78,000 units will be equals to

= $405,000 × 78,000 ÷ 84,000

= $376,071.43

So, the operating cash flow would be

= $376,071.43 - $180,000

= $196,071.43

b. The new degree of operating leverage equals to

= $376,071.43 ÷ $196,071.43

= 1.918

Hence, the operating cash flow is $196,071 and the new degree of operating leverage is 1.918