Question

Degree of operating leverage   Grey Products has fixed operating costs of $ 382 comma 000​, variable operating costs of $ 15.93 per​ unit, and a selling price of $ 63.05 per unit. a. Calculate the operating breakeven point in units. b. Calculate the​ firm's EBIT at 11 comma 000​, 12 comma 000​, and 13 comma 000 ​units, respectively. c. With 12 comma 000 units as a​ base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part ​(b​)? d. Use the percentages computed in part ​(c​) to determine the degree of operating leverage​ (DOL). e. Use the formula for degree of operating leverage to determine the DOL at 12 comma 000 units.

a. The operating breakeven point is nothing units. ​ (Round to the nearest​ integer.)

Answer 1

a.Operating break even point = Fixed costs/(Selling price per unit - variable costs per unit)
=382,000/(63.05-15.93)
8106.961	units
b.Units	11,000	12,000	13,000
Contribution Margin i.e. Sales - variable costs	518,320	565,440	612,560
Less: Fixed costs	382,000	382,000	382,000
EBIT	136,320	183,440	230,560
% change in Sales	-8.33%		8.33%
% change in EBIT	-25.69%		25.69%
DOL = % change in EBIT/% Change in Sales	3.08242477		3.08242477
e.DOL = Contribution margin/EBIT		3.08242477