Question
In: Finance
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 | |||
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