Cantor Products sells a product for $75. DM costs per unit and DL costs per unit...

Cantor Products sells a product for $75. DM costs per unit and DL costs per unit are $45. Depreciation Expenses costs and Production supervisor’s salary are $75,000. Answer the following questions: a. What is the break-even point in units? b. What unit sales would be required to earn a target profit of $200,000? c. Assume they achieve the level of sales required in part b, what is the degree of operating leverage? d. If sales decrease by 30% from that level, by what percentage will profits decrease?

Solutions

Expert Solution

a) breakeven point in units = Fixed costs ( selling price - variable cost)

breakeven point in units = $ 75,000 ( $ 75 - $ 45)

breakeven point in units = 2500 units

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b) Profit = Revenue - cost

$ 200,000 = $ 75 x Q - [ $ 75,000 + $ 45 Q ]

Q = 9167 units

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c) Degree of operating leverage = 1 +( FC OCF )

OCF = - $ 75,000 + ( P - V ) x Q

OCF = - $ 75,000 + ( $ 75 - $ 45) x 9167

OCF = $ 200,010

DOL = 1 + ( $ 75,000 $ 200,010)

DOL = 1.37

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Decrease in sales level by 30% = 9167 units - 0.30 x 9167

Decrease in sales level by 30% = 6417 units

Profit = 6417 x $ 75 - [ $ 75,000 + $ 45 x 6147 ]

Profit = $ 129,660

% decrease in profit = ( $ 200,000 - $ 129,660) ( $ 129,660)

% decrease in profit = 54.25%

ekkarill92 answered 1 year ago

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