Question

2)   A proposed project has fixed costs of $25,000 and a depreciation of $8,000 per year. The variable costs are $7 per unit and sales are $9 per unit.

      a)   What is the breakeven point in units produced?

      b)   What is the breakeven point in dollars of revenue?

      c)   If the operating profit at 20,000 units is $7,000. What is the degree of operating leverage?

            d)   If sales increase to 22,000 units, what will operating profits be? What will the new operating leverage be?

Answer 1

Sales per Unit = $9

Variable Cost per unit = $ 7

- Contribution = Sales per Unit - Variable Cost per unit

= $9 - $7

= $2

-Contribution margin = (Sales per Unit - Variable Cost per unit)/Sales per Unit

= (9-7)/9

= 22.22%

Total Fixed cost = $25,000 + $8000

= $33000

a). Breakeven Point in units = Fixed Cost/Contribution

= $33000/$2

= 16500 units

b). Breakeven Point in dollar = Fixed Cost/Contribution margin

= $33,000/22.22%

= $ 148500

c). Operating profit(EBIT) at 20,000 units = $ 7000

Degree of Operating leverage(DOL) = Contribution/EBIT

Contribution at 20,000 units = 20,000 units *$2

= $40,000

DOL = $40,000/$7000

= 5.7143 times

d). Sales increased to = 22000 units

Operating Profit = Contribution - Total Fixed Cost

Operating Profit at 22000 units = (22,000*$2) - $33,000

= $ 11,000

So, Operating Profit at 22000 units is $ 11,000

- Calculating New DOL at 22000 units

Degree of Operating leverage(DOL) = Contribution/EBIT

Contribution at 22,000 units = 22,000 units *$2

= $44,000

Operating profit at 22000 units = $11,000

DOL = $44,000/$11000

= 4 times

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating