Question

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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

Answer 1

Calculation of the Contribution Margin per unit

Operating Leverage = [Number of units x Contribution margin per unit] / Net Operating income

2.10 = [18,500 Units x Contribution margin per unit] / $44,000

[2.10 x $44,000] = [18,500 units x Contribution margin per unit]

$92,400 = [18,500 x Contribution margin per unit]

Therefore, the Contribution margin per unit = $92,400 / 18,500 units

Contribution margin per unit = $4.99459 per unit

New degree of operating leverage for output levels of 19,500 units

Operating Leverage = [Number of units x Contribution margin per unit] / Net Operating income

= [19,500 x $4.99459 per unit per unit] / $44,000

= $97,394.59 / $44,000

= 2.10

New degree of operating leverage for output levels of 17,500 units

Operating Leverage = [Number of units x Contribution margin per unit] / Net Operating income

= [17,500 x $4.99459 per unit per unit] / $44,000

= $87,405.41 / $44,000

= 1.99