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

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