Question

At an output level of 46,000 units, you calculate that the degree of operating leverage is 3.20. Suppose fixed costs are $130,000. What is the operating cash flow at 40,000 units? (Do not round intermediate calculations and round your final answer to the nearest whole number, e.g., 32.) Operating cash flow $

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

Answer 1

Operating cash flow for 40,000 units = $34,426.88

New degree of operating leverage = 4.776

Step-by-step explanation:

Data provided in the question:

Output level = 46,000 units

Degree of operating leverage = 3.20

Fixed costs = $130,000

Now,

Operating leverage = ( Contribution margin ) ÷ ( Operating cash flow )

Also,

Contribution margin = Operating cash flow + Fixed costs

Thus,

3.20 = ( Operating cash flow + Fixed costs ) ÷ ( Operating cash flow )

or

3.20 = 1 + ( Fixed costs ) ÷ ( Operating cash flow )

or

Operating cash flow = $130,000 ÷ 2.20

or

Operating cash flow = $59,090.91

contribution margin for 46,000 units = $59,090.91 + $130,000

= $189,090.91

and,

Contribution margin for 40,000 units= $189,090.91 × [ 40,000 ÷ 46,000 ]

= $164,426.88

Therefore,

Operating cash flow for 40,000 units

= Contribution margin - Fixed costs

= $164,426.88 - $130,000

= $34,426.88

Now,

New degree of operating leverage = Contribution margin ÷ Operating cash flow

= $164,426.88 ÷ $34,426.88

= 4.776