At an output level of 8,200 units, you have calculated that the degree of operat

Question

At an output level of 8,200 units, you have calculated that the degree of operating leverage is 1.90. The operating cash flow is $62,500 in this case.

What will the operating cash flow be if output rises to 9,200 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  

What will the operating cash flow be if output falls to 7,200 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

At an output level of 8,200 units, you have calculated that the degree of operating leverage is 1.90. The operating cash flow is $62,500 in this case.

What will the operating cash flow be if output rises to 9,200 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 7,200 units? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

  Operating cash flow $   

Explanation / Answer

Degree of operating leverage= % Change in EBIT/% Change in sales

If the output rises to 9200 then % change in sales = (9200-8200)/8200 =12.195%

So, as per DOL % change in EBIT= % Change in Sales*DOL

=12.195*1.90

=23.171%

So let’s say operating cash flows = EBIT,

Change in operating cash flows = $ 62,500+23.171% = $ 76,981.88

Operating Cash flows if units sold is 9200 = $ 76,981.88

b) If sales fall to 7,200 units then:

% fall in sales = 1000/8200 = 12.195%

% fall in EBIT as per DOL = 12.195*1.90 = 23.171%

So, operating cash flow will be = $ 62,500- 23.171% = $ 48,018.13

Operating Cash flows if units sold is 7200 = $ 48,018.13

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