At an output level of 50,000 units, you calculate that the degree of operating l

Question

At an output level of 50,000 units, you calculate that the degree of operating leverage is 3.50. Suppose fixed costs are $290,000. What is the operating cash flow at 44,000 units?

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

At an output level of 50,000 units, you calculate that the degree of operating leverage is 3.50. Suppose fixed costs are $290,000. What is the operating cash flow at 44,000 units?

Explanation / Answer

Number of units produced =50000 units.

Degree of operating leverage = 3.5

Fixed costs = $290,000

Formula for calculation of Operating leverage = Contribution/EBIT

Given operating leverage =3.5

3.5 =Contribution/EBIT

EBIT=Contribution/3.5

EBIT = Contribution - Fixed costs

Contribution -Fixed costs = Contribution/3.5

Contribution -Contribution/3.5 =Fixed costs

Given fixed costs= $290,000

0.71428571* Contribution =$290,000

Contribution = $290,000/0.71428571

Contribution =$406,000

Output level at this point = 50,000

Contribution per unit = $406,000/50,000 =$8.12

Contribution at 44,000 units =44,000*$8.12

=$357,280

Degree of operrating leverate at 44,000 units = Contribution/EBIT

Contribution/Contribution - Fixed costs

=$357,280/$357,280 - $290,000

=$357,280/$67,280

=5.31.

Operating cash flow at 44,000 units =

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