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At an out level of 45,000 units you calculate that the dgree of operating leverage is 2
At an out level of 45,000 units you calculate that the dgree of operating leverage is 2.79. If output rises to 48,000 units what the percentage change in operating cash flow be? Will the new level of operating everage be higher or lower? Explain
Expert Solution
| % change in output = ( 48000 - 45000 ) / 45000 = | 6.667% |
| % change in operating cash flow = % change in output * dgree of operating leverage = 6.667% * 2.79 = | 18.60% |
| New level of operating leverage will be lower, because the level of output has increased. |
| The relation between level of output and operating leverage in inverse. As the level of output increases the operating leverage decreases and when the level of output decreases the operating leverage increases. |
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