Question

​(Operating leverage​) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for​ high-performance engines. The average selling price for the various units is ​$550. The associated variable cost is ​$300 per unit. Fixed costs for the firm average $ 200 comma 000 annually.

a. What is the​ break-even point in units for the​ company?

b. What is the dollar sales volume the firm must achieve to reach the​ break-even point?

c. What is the degree of operating leverage for a production and sales level of 4 comma 000 units for the​ firm? (Calculate to three decimal​ places.)

d. What will be the projected effect on earnings before interest and taxes if the​ firm's sales level should increase by 35 percent from the volume noted in part c​?

Answer 1

Solution a
	Sale revenue	$                                         550.00
	Variable cost	$                                         300.00
	Contribution per bag (Sale less variable cost)	$                                         250.00
	Fixed cost	$                                       200,000
	Break-even point=	Fixed cost/contribution per bag
	Break-even point=	=200000/250
	Break-even point=	800	Units
Solution b	Break-even point in sale revenue	800*550
	Break-even point in sale revenue	$                                  440,000.00
Solution c			4000 units
	Sale revenue	$                                         550.00	$       2,200,000
	Variable cost	$                                         300.00	$       1,200,000
	Contribution per bag (Sale less variable cost)	$                                         250.00	$       1,000,000
	Fixed cost	$                                       200,000	$          200,000
	Net income		$          800,000
	Operating leverage=	Contribution/(contribution - fixed cost)
	Operating leverage=	1000000/800000
	Operating leverage=	1.25	times
Solution D	Increase in sale	35%
	Increase in net income	1.25*35%	Incresae in sale * Degree of operating leverage
	Increase in net income	43.75%	increase