Question

At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.26. The operating cash flow is $78,000 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for 18,500 units and 16,500 units? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) DOL at 18,500 units DOL at 16,500 units

Answer 1

• DOL at 18,500 = 2.91
• DOL at 16,500 = 3.78

Step-by-step explanation:

First find out the Contribution margin per unit and the fixed costs to enable you calculate the profit for the 18,500 units and the 16,500 units.

DOL = Contribution Margin/ Profit

3.26 = Contribution Margin/ 78,000

Contribution Margin = 3.26 * 78,000

= $254,280

Per unit = 254,280/17,500 = $14.53

Fixed Costs = Contribution - Profit

= 254,280 - 78,000

= $176,280

DOL at 18,500 units.

Profit = (14.53 * 18,500) - fixed costs of $176,280

= $92,525

DOL = Contribution/ Profit

= (14.53 * 18,500) / 92,525

= 2.91

DOL at 16,500 units.

Profit = (14.53 * 16,500) - 176,280

= $63,465

DOL = (14.53 * 16,500) / 63,465

= 3.78