At an output level of 45,000 units, you calculate that the degree of operating leverage is...

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Finance

At an output level of 45,000 units, you calculate that thedegree of operating leverage is 2.79. Fixed costs are $175,000.
a. What is the operating cash flow at 43,000 units? (Do notround intermediate calculations and round your answer to thenearest whole number, e.g., 32.)
b. What is the degree of operating leverage? (Do not roundintermediate calculations and round your answer to 3 decimalplaces, e.g., 32.161.)

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Workings for a&b questions:

Calculation of Contribution:

Operating leverage formula :-

Operating leverage= contribution/EBIT

2.79= sales-variable cost/sales - variable cost-fixes cost

2.79(sales-variable cost-175,000)= sales-variable

2.79 sales- 2.79 variable cost-488,250 =sales-variable cost

1.79sales-1.79 variable cost= 488,250

1.79(sales-variable)= 488,250

1.79contribution = 488,250

Contribution= 488,250/1.79

Contribution=272,765.363

Contribution at 45,000 units is 272,765.363

Contribution at 43,000 = 43,000×272,765.363/45,000 = =260,642.459

Assumed that,Fixed cost doesn't change with units produced.

a) calculation of operating cash flows at 43,000 units:

operating cash flows = contribution- fixed cost

= 260,642.459 - 175,000

= 85,642.459.

b) calculation of degree of operating leverage:-

Operating leverage = contribution/ EBIT

= Contribution/ (contribution - fixed cost

= 260,642.459/85,642.459

=3.043

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Transcribed Image Text

At an output level of 45,000 units, you calculate that thedegree of operating leverage is 2.79. Fixed costs are $175,000.a. What is the operating cash flow at 43,000 units? (Do notround intermediate calculations and round your answer to thenearest whole number, e.g., 32.)b. What is the degree of operating leverage? (Do not roundintermediate calculations and round your answer to 3 decimalplaces, e.g., 32.161.)