Question

At an output level of 76,000 units, you calculate that the degree of operating leverage is 3.3. The output rises to 81,000 units. What will the percentage change in operating cash flow be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Percentage change in OCF 21.71 % Will the new level of operating leverage be higher or lower? Higher Lower

Answer 1

21.71%

Step-by-step explanation:

We know that

Degree of operating leverage = Change in operating cash flow ÷ Change in the output level

3.3 = Change in operating cash flow ÷ 0.065789

So, the percentage change in OCF = 3.3 × 0.065789

= 21.71%

The Change in the output level is computed below

= (Increased output - normal output level) ÷ normal output level

= (81,000 units - 76,000 units) ÷ 76,000 units

= 5,000 units ÷ 76,000 units

= 0.065789