Question

8.3       The C&D TV store currently has fixed costs of $6,000 per month and $400 per TV set. Their sales price for the TV sets is $700 each, and their current volume is 25 sets per month.

            a) Find C&D’s break-even point and their NOI and DOL at the current level of sales (20 units per month, NOI=$1,500, and DOL=5).

            b) Find C&D’s break-even point and their NOI and DOL if fixed costs decrease to $4,750 and at the same time the cost of TV sets rises to $450 (19 units per month, NOI=$1,500, and DOL=4.1667).

Answer 1

Fixed Costs of C&D TV Store = $6000 per month

Variable Costs = $400 per TV Set

Sales Price = $700 per TV Set

Contribution = Sales price - Variable Costs

= $700 - $400

=$300 per TV set

a). Breakeven Point = Fixed Costs/Contribution

=$6000/$300

= 20 TV set per month

Net Operating Income(NOI) = Total Contribution Value- Fixed Cost

=($300 per TV set*25 set) - $6000

= $1500

Degree of Operating Level(DOL) = Total Contribution Value/NOI

= ($300 per TV set*25 set)/$1500

=$7500/$1500

= 5 times

b). Now, Fixed Assets reduced to $4750

& Variable Costs rises to = $450 per TV Set

Sales Price = $700 per TV Set

Contribution = Sales price - Variable Costs

= $700 - $450

=$250 per TV set

Breakeven Point = Fixed Costs/Contribution

=$4750/$250

= 19 TV set per month

Net Operating Income(NOI) = Total Contribution Value- Fixed Cost

=($250 per TV set*25 set) - $4750

= $1500

Degree of Operating Level(DOL) = Total Contribution Value/NOI

= ($250 per TV set*25 set)/$1500

=$6250/$1500

=4.1667 times

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