At an output level of 50,000 units, you calculate that the degree of operating leverage is 3.50....

Question:

At an output level of 50,000 units, you calculate that the degree of operating leverage is 3.50. Suppose fixed costs are $290,000. What is the operating cash flow at 44,000 units? (Do not round intermediate calculations and round your final answer to the nearest whole number, e.g., 32.)

What is the new degree of operating leverage? (Do not round intermediate calculations and round your final answer to 3 decimal places, e.g., 32.161.)

Operating Cash Flow:

Operating cash flow is calculated by adding all the non-cash expenses in the net income of the company. The non-cash expense includes depreciation, amortization. Operating cash flow is used in the capital budgeting and the preparation of cash flow statement.

Answer and Explanation:

Degree of operating leverage at 50,000 Units

{eq}Degree \ of \ operating \ leverage \ = \ \frac{Contribution}{EBIT} \\ 3.50 \ = \ \frac{\left [ Fixed \ Cost \ + \ EBIT \right ]}{EBIT \ \left [ Contribution \ can \ also \ be \ expressed \ as \ Fixed \ cost \ + \ EBIT \right ]} \\ 3.50 \ = \ \frac{290,000 \ + \ EBIT}{EBIT} \\ 3.50 \ EBIT \ = \ 290,000 \ + \ EBIT \\ 2.50 \ EBIT \ = \ 290,000 \\ EBIT \ = \ \$116,000 {/eq}

Contribution = 290,000 + 116,000

Contribution = $406,000

a)

Operating Cash flow at 44000 Units:-

Contribution [44,000 * 406,000/50,000] = 44,000 * 8.12 357,280
(Less:) Fixed Costs 290,000
EBIT / Operating Cash flow (Assuming no change in working capital during the year) 67,280

Conclusion:- Operating Cash flow at 44,000 Units = $67,280


b)

The new degree of Operating leverage = {eq}\frac{Contribution}{EBIT} {/eq}

The new degree of Operating leverage = {eq}\frac{357,280}{67,280} {/eq}

The new degree of Operating leverage = 5.310


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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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