Question

At an output level of 15,200 units, you have calculated that the degree of operating leverage is 2.60. The operating cash flow is $57,500 in this case. Ignore the effect of taxes. a. What are fixed costs? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What will the operating cash flow be if output rises to 16,200 units?

Answer 1

Will increase up to $67,332.5

Step-by-step explanation:

As per the information we have,

output level = 15,200units

operating leverage = 2.60

operating cash flow = $57,500

First we will calculate the fixed cost:

we can calculate fixed cost with the help of degree of operating leverage formula:

degree of operating leverage = 1 + fixed cost / operating cash flow

2.60 = 1 + fixed cost / 57,500

57,500 + fixed cost = 2.60 * 57,500

fixed cost = 149,500 - 57,500 = $92,000 is the fixed cost.

Now, let us calculate the operating cash flow if output rises to 16,200units:

Percentage Change in Quantity Sold = (16,200 – 15,200) / 15,200 = 0.0658 or 6.58% Percentage Change in OFC = DOL × Percentage Change in Quantity Sold

= 2.6 × 0.0658 = 0.171

New OCF = 57,500 * ( 1 + 0.171)

= 57,500 × 1.171 = $67,332.5