At an output level of 15,400 units, you have calculated that the degree of opera

Question

At an output level of 15,400 units, you have calculated that the degree of operating leverage is 2.00. The operating cash flow is $58,000 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 16,400 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 14,400 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Operating leverage = 1 + (fixed cost / cash flow)

2 = 1 + (Fixed cost / 58000)

fixed cost = $ 58000

b ) Units = 16,400 units

Degree of Operating Leverage(DOL) = 2

Percentage change in output = (16400 - 15400)/15400 = 0.064

Percentage change in cash flow = DOL * Percentage change in output

Percentage change in cash flow = 2 * 0.064 = 0.128

so , there'll be a percentage change of 12.8% from the last cash flow i,e $58000 * 1.128% =$ 65424

c) Units = 14,400 units

Degree of Operating Leverage(DOL) = 2

Percentage change in output = (15400 - 14400)/15400 = 0.064

Percentage change in cash flow = DOL * Percentage change in output

Percentage change in cash flow = 2 * 0.064 = 0.128

so , there'll be a percentage change of 12.8% from the last cash flow i,e $58000 * 1.128% =$ 65424

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