2) Grey Products has fixed operating costs of $380,000, variable operating costs of $18 per unit,...

2) Grey Products has fixed operating costs of $380,000, variable operating costs of $18 per unit, and a selling price of $65 per unit.

a.Calculate the operating breakeven point in units.

b.Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively.

c.With 10,000 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 2?

d.Use the percentages computed in part 3 to determine the degree of operating leverage (DOL).

e.Use the formula for the degree of operating leverage to determine the DOL at 10,000 units.

Solutions

Expert Solution

a.
Calculation of operating breakeven point in units

Operating breakeven points = Fixed costs/Contribution margin per unit

Contribution margin per unit = Sales price - Variable costs
Contribution margin per unit = $65 - $18
Contribution margin per unit = $47

Operating breakeven points = 380,000/47
Operating breakeven points	8085.11
The operating breakeven point in units is 8,085.

b.
Calculation of EBIT
Sale units	$9,000	$10,000	$11,000
Sales revenue (Sales units*65)	$585,000	$650,000	$715,000
Less: Variable cost (Sales units*18)	$162,000	$180,000	$198,000
Contribution margin	$423,000	$470,000	$517,000
Less: Fixed operating costs	$380,000	$380,000	$380,000
EBIT	$43,000	$90,000	$137,000

c.
Percentage change in units sold for 9,000 units	(9000-10000)/10000	-10.00%
Percentage change in EBIT for 9,000 units sold	(43000-90000)/90000	-52.22%

Percentage change in units sold for 11,000 units	(11000-10000)/10000	10.00%
Percentage change in EBIT for 11,000 units sold	(137000-90000)/90000	52.22%

d.
Degree of operating leverage = -52.22%/-10%	5.22

e.
Degree of operating leverage at 10,000 units	Contribution margin/EBIT
Degree of operating leverage at 10,000 units	470000/90000
Degree of operating leverage at 10,000 units	5.22

jeff jeffy answered 9 months ago

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