Question

The Niendorf Corporation produces tea kettles, which it sells for $15 each. Fixed costs are $700,000 for output up to 400,000 units. Variable costs amount to $10 per kettle.

a. What is the firm's gain or loss at sales of 125,000 units? of 175,000 units?

b. What is the breakeven point? Illustrate your answer with a graph.

c. What is Niendorf's degree of operating leverage at sales of 150,000 units? Of 175,000 units?

Answer 1

Selling price p.u. = $ 15

Variable cost p.u. = $ 10

Contribution p.u. = $ 5

Fixed cost = $ 700,000

Break even point = Fixed cost / contribution p.u.

Break even point = $ 700,000 / 5 = 140,000 units

(a) Firm's Gain / Loss = contribution x margin of safety

Firm's Gain / (Loss) = 5 x units sold - breakeven point

Firm's Gain / (Loss) = 5 x (125000 - 140000)

Firm's Gain / (Loss) = ($ 75,000)

Firm's Gain / Loss = contribution x margin of safety

Firm's Gain / (Loss) = 5 x units sold - breakeven point

Firm's Gain / (Loss) = 5 x (175000 - 140000)

Firm's Gain / (Loss) = $ 175,000

(b) Break even point = Fixed cost / contribution p.u.

Break even point = $ 700,000 / 5 = 140,000 units

(c)

Degree of operating leverage = Contribution / Profit

Units sold	150,000	175,000
Particulars
Sales (@ 15 p.u.)	2,250,000	2,625,000
Variable cost (@ 10 p.u.)	1,500,000	1,750,000
Contribution	750,000	875,000
Fixed cost	700,000	700,000
Profit	50,000	175,000
Degree of operating leverage	15.00	5.00

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