Question

Cantor Products sells a product for $85. Variable costs per unit are $35, and monthly fixed costs are $235,000.

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

b. What unit sales would be required to earn a target profit of $330,000?

c. Assume they achieve the level of sales required in part b, what is the degree of operating leverage? (Round your answer to 3 decimal places.)

  

d. If sales decrease by 30% from that level, by what percentage will profits decrease? (Do not round intermediate calculation. Round your answer to 2 decimal places.)

Answer 1

a.	4,700 units

Explanation:-

Break-even units = Fixed costs/ unit Contribution margin

Break-even units = $235,000/($85 -$35)

Break-even units = $235,000/$50

Break-even units = 4,700 units

b.	11,300 units

Explanation:-

Target units = (Fixed cost + Target profit) / unit Contribution margin

Target units = ($235,000 +$330,000)/ ($85 -$35)

Target units = $565,000/$50

Target units =11,300 units

c.

1.712

Explanation:-

Degree of operating leverage = Contribution Margin/ profit

Degree of operating leverage = 11,300 × ($85-$35)/$330,000

Degree of operating leverage = 11,300 ×$50/$330,000

Degree of operating leverage = $565,000/$330,000

Degree of operating leverage =1.712

d.

51.36%

Explanation:-

Change in profit = change in revenue × degree of operating leverage

Change in profit = 30% ×1.712

Change in profit = 51.36%