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.)
|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|
|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|
|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|
|Change in profit = change in revenue × degree of operating leverage|
|Change in profit = 30% ×1.712|
|Change in profit = 51.36%|
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