Referring to the Cranberry Company of the previous problem: a. Calculate the DOL when sales are...

Referring to the Cranberry Company of the previous problem: a. Calculate the DOL when sales are 20%, 30% and 40% above breakeven. b. Suppose automated equipment is added which increases fixed costs by $20,000 per month. How much will total variable cost have to decrease to keep the breakeven point the same? c. Calculate the DOL at the same output levels used in part a. d. Comment on the differences in DOL with and without the additional equipment.

Previous problem

Cranberry Wood Products Inc. spends an average of $9.50 in labor and $12.40 in materials on every unit it sells. Sales commissions and shipping amount to another $3.10. All other costs are fixed and add up to $140,000 per month. The average unit sells for $32.00.

a. What are Cranberry's contribution and contribution margin?

b. What is the firm's breakeven point in units?

c. Calculate the dollar breakeven point in two ways.

d. Sketch the Breakeven Diagram.

Expert Solution

Contribution margin per unit = $7 per unit

Break even units = $140000 / 7 = 20000 units

Degree of Operating Leverage = Contribution Margin / Operating Income

	20% above	30% above	40% above
Unit sales	24000	26000	28000
Revenue	$ 7,68,000	$ 8,32,000	$ 8,96,000
Variable Costs	$ 6,00,000	$ 6,50,000	$ 7,00,000
Contribution Margin	$ 1,68,000	$ 1,82,000	$ 1,96,000
Fixed Costs	$ 1,40,000	$ 1,40,000	$ 1,40,000
Operating Income	$ 28,000	$ 42,000	$ 56,000
DOL	6.00	4.33	3.50

Desired Variable costs = 20000 x $32 - 160000 = $480000
Total Variable Costs have to decrease by $20000 i.e. $1 per unit

	20% above	30% above	40% above
Unit sales	24000	26000	28000
Revenue	$ 7,68,000	$ 8,32,000	$ 8,96,000
Variable Costs	$ 5,76,000	$ 6,24,000	$ 6,72,000
Contribution Margin	$ 1,92,000	$ 2,08,000	$ 2,24,000
Fixed Costs	$ 1,60,000	$ 1,60,000	$ 1,60,000
Operating Income	$ 32,000	$ 48,000	$ 64,000
DOL	6.00	4.33	3.50

ekkarill92 answered 2 years ago

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