At an output level of 22,500 units, you calculate that the degree of operating leverage is 1.37. What will be the percentage change in operating cash flow if the new output level is 25,000 units?
A) 17.78 percent
B) 16.17 percent
C) 15.22 percent
D) 17.73 percent
E) 15.08 percent

Question

Quizplus · Accepted Answer

The percentage change in operating cash flow can be calculated using the formula:

Percentage change in operating cash flow = Degree of operating leverage × Percentage change in output

Given, 
Initial output level = 22,500 units
Degree of operating leverage = 1.37
New output level = 25,000 units

Percentage change in output = (New output - Initial output) ÷ Initial output × 100
= (25,000 - 22,500) ÷ 22,500 × 100
= 11.11%

Using the formula for percentage change in operating cash flow:

Percentage change in operating cash flow = Degree of operating leverage × Percentage change in output
= 1.37 × 11.11%
= 15.22%

Therefore, the best choice is C, which corresponds to a percentage change in operating cash flow of 15.22%.

At an Output Level of 22,500 Units, You Calculate That