Question

a. Before you can compute the​ firm's break-even point in sales​ dollars, you need to compute some items on the​ firm's income statement.

The​ firm's operating assets are 3,600,000 and the operating asset turnover is 7 times. What are the​ firm's sales​ revenues?

​$nothing  

​(Round to the nearest​ dollar.)

The​ firm's operating assets are 3,600,000

and the return on operating assets is 34%. What is the​ firm's EBIT?

​$nothing

​(Round to the nearest​ dollar.)

Given the degree of operating leverage of

4 times the sales and EBIT computed in previous​ steps, what are the​ firm's total variable​ costs?

​$nothing

​ (Round to the nearest​ dollar.)

Based on the computed​ sales, EBIT, and variable​ costs, what are the​ firm's total fixed​ costs?

​$nothing  

​(Round to the nearest​ dollar.)

Output level	78,000 units
Operating assets	​3,600,000
Operating asset turnover	7 times
Return on operating assets	34​%
Degree of operating leverage	4 times
Interest expense	600,000
Tax rate	38​%

Answer 1

Ans. 1	Assets turnover = Sales / Operating assets
	7 = Sales / $3,600,000
	Sales = $3,600,000 * 7
	Sales = $25,200,000
Ans. 2	Return on operating assets = EBIT / Operating assets
	34% = EBIT / $3,600,000
	EBIT =   $3,600,000 * 34%
	EBIT =   $1,224,000
Ans. 3	Degree of operating leverage    =   Contribution margin / EBIT
	4 = Contribution margin / $1,224,000
	Contribution margin =   $1,224,000 * 4
	Contribution margin =   $4,896,000
	Total variable costs = Sales - Contribution margin
	$25,200,000 - $4,896,000
	$20,304,000
Ans. 4	Total Fixed cost = Contribution margin - EBIT
	$4,896,000 - $1,224,000
	$3,672,000
BREAK   EVEN   CALCULATIONS:
	Contribution margin ratio   = Contribution margin / Sales * 100
	$4,896,000 / $25,200,000 * 100
	19.43%
	Break even point in dollar sales =   Fixed cost / Contribution margin ratio
	$3,672,000 / 19.43%
	$18,898,610	(rounded)