Question

​(Operating leverage​) The Quarles Distributing Company manufactures an assortment of cold air intake systems for​ high-performance engines. The average selling price for the various units is ​$600 . The associated variable cost is ​$200 per unit. Fixed costs for the firm average $ 200 comma 000 annually. a. What is the​ break-even point in units for the​ company? b. What is the dollar sales volume the firm must achieve to reach the​ break-even point? c. What is the degree of operating leverage for a production and sales level of 5 comma 000 units for the​ firm? (Calculate to three decimal​ places.) d. What will be the projected effect on earnings before interest and taxes if the​ firm's sales level should increase by 20 percent from the volume noted in part ​(c​)? a. What is the​ break-even point in units for the​ company?

Answer 1

a
Break-even point in units = Fixed expeses/Unit contribution margin = 200000/(600-200)= 500
b
break-even point in dollar sales = 500*600= $300000
c
Contribution margin at 5000 units = 5000*(600-200)= $2000000
Net operating income at 5000 units = 2000000-200000 = $1800000
Degree of operating leverage = 2000000/1800000= 1.111 times
d
Increase in earnings before interest and taxes = 5000*20%*400= $400000