Question

At an output level of 17,000 units, you have calculated that the degree of operating leverage is 2.00. The operating cash flow is $33,800 in this case. Ignore the effect of taxes. What will be the new degree of operating leverage for output levels of 18,000 units and 16,000 units? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) 18,000 units 16,000 units Degree of operating leverage

Answer 1

Degree of Operating Leverage = Contribution Margin (CM) / Net Operating Income (NOI) = (Revenue - Total Variable Cost) / Net Operating Income = Quantity x (Price - Variable Cost per Unit) / [Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost]

2 = 17000*( P - VC)/33800

P - VC = 3.976

Also,

33800 = Q*(p-vc) - FC

33800 = 17000*3.976 - FC

FC = 33800

For quantity = 16000

DOL = 16000*3.976/(16000*3.976-33800)   = 2.13

For quantity = 18000

DOL = 18000*3.976/(18000*3.976-33800)   = 1.89