3.00 points P11-13 Operating Cash Flow and Leverage LO4] A proposed project has

Question

3.00 points P11-13 Operating Cash Flow and Leverage LO4] A proposed project has fixed costs of $35,000 per year. The operating cash flow at 17,000 units is $71,000 Required (a)Ignoring the effect of taxes, what is the degree of operating leverage? (Do not round your intermediate calculations.) (Click to select) (b)lf units sold rise from 17,000 to 17,200, what will be the increase in operating cash flow? (Do not round your intermediate calculations.) (Click to select (c)What is the new degree of operating leverage? (Do not round your intermediate calculations.) (Click to select)

Explanation / Answer

Answer a.

Fixed Costs = $35,000
Operating Cash Flow = $71,000

Degree of Operating Leverage = 1 + Fixed Costs / Operating Cash Flow
Degree of Operating Leverage = 1 + $35,000 / $71,000
Degree of Operating Leverage = 1.49

Answer b.

% Increase in Sales = (17,200 - 17,000) / 17,000
% Increase in Sales = 1.18%

Increase in Operating Cash Flows = Operating Cash Flows * % Increase in Sales
Increase in Operating Cash Flows = $71,000 * 1.18%
Increase in Operating Cash Flows = $837.80

Answer c.

New Operating Cash Flows = Old Operating Cash Flows + Increase in Operating Cash Flows
New Operating Cash Flows = $71,000 + $837.80
New Operating Cash Flows = $71,837.80

Degree of Operating Leverage = 1 + Fixed Costs / Operating Cash Flow
Degree of Operating Leverage = 1 + $35,000 / $71,837.80
Degree of Operating Leverage = 1.49

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