Question

at an output level of 21000 units the degree of operating leverage is 2.95 and the operating cash flow is 180000 if output changes to 19500 units what will be the new operating cash flow

Answer 1

New cash flow= $142,070.67

Step-by-step explanation:

Giving the following information:

Actual sales level= 21,000

Degree of operating leverage= 2.95

Operating cash flow= $180,000

New sales level= 19,500 units

Operating leverage is a formula that determines the change in operating income by an increase or decrease in sales revenue.

First, we need to calculate the percentage change in sales units:

Change in units= [1 - (19,500/21,000)]*100= 7.143%

Now, the change in operating income:

Decrease in income= (0.07143*2.95)*180,000= $37,929.33 decrease

New cash flow= 180,000 - 37,929.33= $142,070.67