At an output level of 15,200 units, you have calculated that the degree of opera
ID: 2739133 • Letter: A
Question
At an output level of 15,200 units, you have calculated that the degree of operating leverage is 2.60. The operating cash flow is $57,500 in this case. Ignoring the effect of taxes, what are fixed costs? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) Fixed costs $ What will the operating cash flow be if output rises to 16,200 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Operating cash flow $ What will the operating cash flow be if output falls to 14,200 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Operating cash flow $
Explanation / Answer
As per the information we have,
output level = 15,200units
operating leverage = 2.60
operating cash flow = $57,500
First we will calculate the fixed cost:
we can calculate fixed cost with the help of degree of operating leverage formula:
degree of operating leverage = 1 + fixed cost / operating cash flow
2.60 = 1 + fixed cost / 57,500
57,500 + fixed cost = 2.60 * 57,500
fixed cost = 149,500 - 57,500 = $92,000 is the fixed cost.
Now, let us calculate the operating cash flow if output rises to 16,200units:
Percentage Change in Quantity Sold = (16,200 – 15,200) / 15,200 = 0.0658 or 6.58% Percentage Change in OFC = DOL × Percentage Change in Quantity Sold
= 2.6 × 0.0658 = 0.171
New OCF = 57,500 * ( 1 + 0.171)
= 57,500 × 1.171 = $67,332.5
Now, let us calculate the operating cash flow if output falls to 14,200units:
Percentage Change in Quantity Sold = (14,200 – 15,200) / 15,200 = -0.0658 or 6.58% Percentage Change in OFC = DOL × Percentage Change in Quantity Sold
= 2.6 × -0.0658 = -0.171
New OCF = 57,500 × (1 - 0.171)
= 57,500 * 0.829 = $47,667.5
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