Problem 11-13 operating cash flow and leverage [lo4] a proposed project has fixed costs of $94,000 per year. the operating cash flow at 6,400 units is $88,800. ignore the effect of taxes. a. what is the degree of operating leverage? (do not round intermediate calculations and round your answer to 4 decimal places, e. g., 32.1616.) b. if units sold rise from 6,400 to 6,900, what will be the new operating cash flow? (do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) c. what is the new degree of operating leverage? (do not round intermediate calculations and round your answer to 4 decimal places, e. g., 32.1616.)

(a) 2.0586

(b) 103,081.5264

(c) 1.9119

Explanation:

(a) Degree of operating leverage:

      = 1 + 1.058559  

      = 2.0586

(b)

Percentage change in quantity:

= 0.078125 or 7.8125%

Operating cash flow at 6,900 units:

Percentage change in OCF = 2.0586 ( 0.07815%)

                                              = 0.160828 or 16.0828

New OCF = 88,800 ( 1.160828)

New OCF = 103,081.5264

(c)

New Degree of operating leverage:

      = 1 + 0.9119

      = 1.9119

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.