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27 December, 03:37

At an output level of 18,500 units, you have calculated that the degree of operating leverage is 2.10. The operating cash flow is $44,000 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for output levels of 19,500 units and 17,500 units

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  1. 27 December, 04:55
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    1.99; 2.22

    Explanation:

    Given that,

    At output level of 18,500 units,

    Degree of operating leverage = 2.10

    Operating cash flow = $44,000

    For solving this question we need to follow the following relationship between the degree of operating leverage and earnings before interest and taxes and the contribution margin:

    Degree of operating leverage = Contribution margin : operating income

    2.10 = Contribution margin : $44,000

    2.10 * $44,000 = Contribution margin

    $92,400 = Contribution margin

    Now, we can get the total fixed costs by simply multiplying the contribution margin with the number of units.

    Total fixed costs = Number of units * Contribution margin

    = 18,500 * $92,400

    = $1,709,400,000

    At an output level of 19,500,

    Total fixed costs = Number of units * Contribution margin

    New Contribution margin = Total fixed costs : Number of units

    = $1,709,400,000 : 19,500

    = $87,662

    Degree of operating leverage:

    = Contribution margin : operating income

    = $87,662 : $44,000

    = 1.99

    At an output level of 17,500,

    Total fixed costs = Number of units * Contribution margin

    New Contribution margin = Total fixed costs : Number of units

    = $1,709,400,000 : 17,500

    = $97,680

    Degree of operating leverage:

    = Contribution margin : operating income

    = $97,680 : $44,000

    = 2.22
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