Question

At an output level of 12,200 units, you have calculated that the degree of operating leverage is 3.20. The operating cash flow is $67,100 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for output levels of 13,200 units and 11,200 units

Answer 1

Answer:

For 13,200, the Operating Leverage is 3.46.

For 11,200, the Operating Leverage is 2.94.

Explanation:

The first step is to calculate the Contribution Margin per unit:

Operating Leverage = (# of units * Contribution margin per unit) / Net Operating income

Here,

Number of Units are 12,200 Units

Net Operating income $67,100

Operating Leverage is 3.2

By putting values, we have:

3.2 = (12,200 Units * Contribution margin per unit) / $67,100

(3.2 * $67,100) / 12,200 Units = Contribution margin per unit

Contribution margin per unit = $17.6 per unit

For 13,200 units:

By putting value of units and keeping other variables constant, we have:

Operating Leverage = (13,200 units x $17.60 per unit) / $67,100

Operating Leverage = 3.46

For 11,200 units:

By putting value of units and keeping other variables constant, we have:

Operating Leverage = (11,200 units * $17.60 per unit) / $67,100

Operating Leverage = 2.94