Amy is in charge of a project that has a degree of operating leverage of 3.2. What will happen to the operating cash flows if Amy increases the number of units sold by 2 percent?
A) Decrease by 1.6 percent.
B) Decrease by 6.4 percent.
C) Increase by 1.6 percent.
D) Increase by 4.8 percent.
E) Increase by 6.4 percent.

Question

Quizplus · Accepted Answer

The degree of operating leverage is a measure of how much the operating cash flows will change in response to a change in the number of units sold. In this case, the degree of operating leverage is 3.2, which means that a 1% increase in the number of units sold will lead to a 3.2% increase in the operating cash flows. Therefore, a 2% increase in the number of units sold will lead to a 6.4% increase in the operating cash flows.

Amy Is in Charge of a Project That Has a Degree