At an output level of 61,000 units, you calculate that the degree of operating l

Question

At an output level of 61,000 units, you calculate that the degree of operating leverage is 2.00. Suppose fixed costs are $240,000. What is the operating cash flow at 55,000 units? (Do not round intermediate calculations and round your final answer to the nearest whole number, e.g., 32.)

What is the new 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 61,000 units, you calculate that the degree of operating leverage is 2.00. Suppose fixed costs are $240,000. What is the operating cash flow at 55,000 units? (Do not round intermediate calculations and round your final answer to the nearest whole number, e.g., 32.)

Explanation / Answer

1) Degree of operating level is given by the formula = Total Contribution margin/Operating Income

Substituting values, we have 2 = 61000*c/(61000*c-240000), where c is contribution margin per unit.

Further, 122000c - 480000 = 61000c; 61000c = 480000; c = $7.868852 per unit.

Therefore, Operating cash flow at 55000 units = 55000*7.868852 - 240000 = $192,787

2) New Degree of Operating leverage:

Contribution margin/Operating Income = 55000*7.868852/192787 = 2.245

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