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NABICA Manufacturing sells its finished product for an average of $35 per unit with a variable...

NABICA Manufacturing sells its finished product for an average of $35 per unit with a variable cost per unit of $21. The company has fixed operating costs of $1,050,000.

(a) Calculate the firm's operating breakeven point in units.

(b) Calculate the firm's operating breakeven point in dollars.

(c) Using 100,000 units as a base, what is the firm's degree of operating leverage?

Solutions

Expert Solution

Selling price = $35

Less; Variable price = $21

Contribution Margin per unit = $14

Contribution Margin ratio = Contribution margin per unit / Selling price per unit

Contribution Margin ratio = $14 / $35 = 0.40 or 40%

a) Break-even point in units = Fixed Cost / Contribution Margin per unit

Break-even point in units = $1,050,000 / $14 = 75,000 units

Break-even point in units = 75,000 units

b) Break-even point in dollars = Fixed Cost / Contribution Margin ratio

  Break-even point in dollars = $1,050,000 / 0.40 = $2,625,000

Break-even point in dollars = $2,625,000

C)

Firm's operating Income @ 100,000 units = Contribution Margin - Fixed Costs

(100,000 units * $14) - $1,050,000

Operating Income = $350,000

Degree of Operating Leverage = Contribution Margin / Operating Income = (100,000 *14) / 350,000

Degree of Operating Leverage = $1,400,000 / $350,000

Degree of Operating Leverage = 4 times

Final Answers are

a) Break-Even point in units = 75,000 units

b) Break-Even point in dollars = $2,625,000

c) Degree of Operating Leverage =4 times

jeff jeffy answered 2 days ago
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