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A proposed project has fixed costs of $83,000 per year. The operating cash flow at 9,100 units is $ 102,900. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise from 9,100 to 9,500, what will be the increase in opeating cash flow? what is the new degree of operating leverage?

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jepessoa

Answer:

Ignoring the effect of taxes, what is the degree of operating leverage?

  • 1.81

If units sold rise from 9,100 to 9,500, what will be the increase in operating cash flow?

  • $8,171.43 or 7.94%

what is the new degree of operating leverage?

  • 1.75

Explanation:

degree of operating leverage = (units sold x contribution margin) / [(units sold x contribution margin) - fixed costs]

(units sold x contribution margin) - fixed costs] = $102,900

units sold x contribution margin = $102,900 + $83,000 = $185,900

degree of operating leverage = $185,900 / $102,900 = 1.81

contribution margin = $185,900 / 9,100 = $20.4286

operating cash flow (at 9,500 units) = (9,500 x $20.4286) - $83,000 = $111,071.43

operating cash flow will increase by $8,171.43 or 7.94%

new degree of operating leverage = $194,071.43 / $111,071.43 = 1.75

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