Question

Octavio's Tacos sells 14,000 ready-made lunches each year, resulting in operating cash flow of $29,400. At this output level you estimate that the degree of operating leverage is 1.95. What will the operating cash flow be if output falls to 12,500 units? (Do not round your intermediate calculations.)

Answer 1

Given:

Sales 1 = 14,000

Corresponding Operating Cash Flow = $ 29,400

Degree of Operating leverage = 1.95

Operating Cash Flow if Units fall to 12,500 = ?

The Degree of operating Leverage is given by:

% change in Operating Income = DOL * (% Change in Sales)

% change in operating Income = 1.95 * [(12,500-14,000)/14,000]

% change in Operating Income = 1.95 * (-10.71%) = -20.89%

Let the Operating cashflow at 12,500 units be X, then:

(X-29,400) / 29,400 = -20.89%

X-29,400 = -20.89% * 29,400 = -6142.5

X = -6142.5+29400 = 23,257.5

Hence, Operating Cash Flow if Units fall to 12,500 is $ 23,257.50