Answer:
The operating cash flow is $196,071 and the new degree of operating leverage is 1.918
Explanation:
a. The computation of operating cash flow is shown below:
By using the information, first we have to calculate the contribution amount.
We know that the operating leverage equals to
Operating leverage = Contribution ÷ EBIT
And, Contribution = Fixed cost + EBIT
So,
1.80 = Fixed cost + EBIT ÷ EBIT
1.80 EBIT - EBIT = Fixed cost
0.80 EBIT = $180,000
So, EBIT = $180,000 ÷ 0.80 = $225,000
And, the contribution = $180,000 + $225,000 = $405,000
Contribution is calculated for 84,000 units but we have to compute for 78,000 units
So, contribution for 78,000 units will be equals to
= $405,000 × 78,000 ÷ 84,000
= $376,071.43
So, the operating cash flow would be
= $376,071.43 - $180,000
= $196,071.43
b. The new degree of operating leverage equals to
= $376,071.43 ÷ $196,071.43
= 1.918
Hence, the operating cash flow is $196,071 and the new degree of operating leverage is 1.918
