A proposed project has fixed costs of $102,000 per year. The operating cash flow

Question

A proposed project has fixed costs of $102,000 per year. The operating cash flow at 4,900 units is $96,400. Ignoring the effect of taxes, what is the degree of operating leverage? (Round your answer to 4 decimal places. (e.g., 32.1616))

If units sold rise from 4,900 to 5,400, what will be the new operating cash flow? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the new degree of operating leverage? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))

Explanation / Answer

Degree of operating leverage =contribution margin/operating income

contribution margin=Fixed cost+operating cash flow=$102,000+$96,400=$198,400

Contribution per unit=$198,400/4,900=$40.5

degree of operating leverage at 4,900 units=$198,400/$96,400=2.06

new operating cash flow for 5,400 units=Operating cash fllow at 4,900 units+Contribution margin for 500 units

=$96,400+$40.5*500=$116,650

New contribution margin for 5,400 units=no of units*Contribution margin per unit=5,400*$40.5=$218,700

New degree of operating leverage at 5,400 units=$218,700/$116,650=1.875=1.88

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