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

1.99; 2.22

Explanation:

Given that,

At output level of 18,500 units,

Degree of operating leverage = 2.10

Operating cash flow = $44,000

For solving this question we need to follow the following relationship between the degree of operating leverage and earnings before interest and taxes and the contribution margin:

Degree of operating leverage = Contribution margin : operating income

2.10 = Contribution margin : $44,000

2.10 * $44,000 = Contribution margin

$92,400 = Contribution margin

Now, we can get the total fixed costs by simply multiplying the contribution margin with the number of units.

Total fixed costs = Number of units * Contribution margin

= 18,500 * $92,400

= $1,709,400,000

At an output level of 19,500,

Total fixed costs = Number of units * Contribution margin

New Contribution margin = Total fixed costs : Number of units

= $1,709,400,000 : 19,500

= $87,662

Degree of operating leverage:

= Contribution margin : operating income

= $87,662 : $44,000

= 1.99

At an output level of 17,500,

Total fixed costs = Number of units * Contribution margin

New Contribution margin = Total fixed costs : Number of units

= $1,709,400,000 : 17,500

= $97,680

Degree of operating leverage:

= Contribution margin : operating income

= $97,680 : $44,000

= 2.22