Question

The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $600. The associated variable cost is $250 per unit. Fixed costs for the firm average $190,000 annually.

a. What is the break-even point in units for the company?

b. What is the dollar sales volume the firm must achieve to reach the break-even point?

c. What is the degree of operating leverage for a production and sales level of 3,000 units for the firm? (Calculate to three decimal places.)

d. What will be the projected effect on earnings before interest and taxes if the firm's sales level should increase by 50 percent from the volume noted in part (c)? (Need tp be a percentage)

Answer 1

Answer of Part a:

Contribution Margin per unit = Sales per unit – Variable cost per unit
Contribution Margin per unit = $600 - $250
Contribution Margin per unit =     $350

Break Even point in units = Fixed Costs / Contribution Margin per unit
Break Even Point in Units = $190,000 / $350
Break Even Point in Units = 542.86 units

Answer of Part b:

Break Even in Dollars Sales = Break Even units * Sales price
Break Even in Dollars Sales = 542.86 * $600
Break Even in Dollar Sales = $325,716

Answer of Part c:

Contribution Margin = Contribution Margin per unit * Units
Contribution Margin = $350 * 3,000
Contribution Margin = $1,050,000

EBIT = Contribution Margin - Fixed Cost
EBIT = $1,050,000 - $190,000
EBIT = $860,000

Degree of Operating Leverage = Contribution Margin / EBIT
Degree of Operating Leverage = $1,050,000 / $860,000
Degree of Operating Leverage = 1.221 times

Answer of Part d:

An operating leverage of 1.221 times implies that a 1% change in sales will lead to a 1.221% change in the EBIT.

Therefore, a 50% change in Sales will lead to (20 * 1.221) = 24.42% change in EBIT