Question

At an output level of 17,500 units, you have calculated that the degree of operating leverage is 3.40. The operating cash flow is $59,000 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for 18,500 units and 16,500 units?

Answer 1

Answer:

new degree of operating leverage = 3.009

new degree of operating leverage = 3.97

Explanation:

given data

output level X = 17,500 units

operating leverage = 3.40

operating cash flow = $59,000

solution

we will apply here operating leverage equation that is

operating leverage = $\frac{(P-V)*X}{((P-V)*X-FC)}$   ..........1

here we X is output level

and we consider here

(P-V)*X =T         ....................2

so equation 1 will as here as

3.4 = $\frac{T}{T-FC}$

T = 3.4 T - 3.4 FC

so

2.4 T = 3.4 FC

$\frac{FC}{T} =\frac{2.4}{3.4}$

so now put T here from equation 2

$\frac{FC}{(P-V)*X} =\frac{2.4}{3.4}$

$\frac{FC}{(P-V)} =\frac{2.4*17500}{3.4}$

$\frac{FC}{(P-V)} =12352.9411$

so

now for operating leverage for X =  18,500  units

new degree of operating leverage

new degree of operating leverage = $\frac{X}{X -\frac{FC}{(P-V)}}$

put here

new degree of operating leverage = $\frac{18500}{18500 -12352.9411}$

new degree of operating leverage = 3.009

and

now for operating leverage for X =  16,500  units

new degree of operating leverage

new degree of operating leverage = $\frac{X}{X -\frac{FC}{(P-V)}}$

put here

new degree of operating leverage = $\frac{16500}{16500 -12352.9411}$

new degree of operating leverage = 3.97