A proposed project has fixed costs of $84,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $84,000 per year. The operating cash flow at 6,400 units is $95,800. Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g. 32.1616.) Degree of operating leverage If units sold rise from 6,400 to 6,900, what will be the new operating cash flow? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Operating cash flow What is the new degree of operating leverage? (Do not round intermediate calculations. Round your answer to 4 decimal places, e.g., 32.1616.) New DOL

Explanation / Answer

a. Degree of operating leverage = Contribution Margin/Net Operating Income = $       1,79,800 / $ 95,800 = 1.8768 Working: Fixed Cost $           84,000 Operating Cash flow $           95,800 Contribution Margin $       1,79,800 b. Operating Cash flow $ 1,09,846.88 Working: Change in sales units = (6900-6400)/6400 = 7.8125% Change in Operating cash flow = Operating Leverage * Change in Sales =               1.8768 * 7.8125% = 14.6627% Existing Operating Cash flows $           95,800 Change in Operating cash flow $ 95,800 x 14.6627% = $           14,047 Revised Operating cash flow $ 1,09,846.88 c. New degree of operating leverage               1.7647 Working: # 1 Fixed Cost $     84,000.00 Operating Cash flow $ 1,09,846.88 Contribution Margin $ 1,93,846.88 # 2 New degree of operating leverage = Contribution Margin / Operating Cash flow = $ 1,93,846.88 / $ 1,09,846.88 =               1.7647

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