Question

(Break-even Point and Operating Leverage) Matthew Electronics manufactures a
complete line of radio and communication equipment for law enforcement agencies.
The average selling price of its finished product is $175 per unit. The variable cost for
these same units is $140. Matthew’s incurs fixed costs of $550,000 per year.
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 would be the firm’s profit or loss at the following units of production sold:
12,000 units?
d. Find the degree of operating

Answer 1

Part A

Breakeven point in units = fixed costs / contribution margin Per unit

Contribution margin Per unit = selling price per unit - variable cost per unit =175-140=35

Breakeven point in units =550000/35=15714 units

Part B

Breakeven point in dollars = fixed cost / contribution margin ratio

Contribution margin ratio = contribution margin Per unit / selling price per unit = 35/175 =20%

Breakeven point in dollars = 550000/20%=2750000

Part C

Sales (12000*175)	2100000
Less: variable cost (12000*140)	1680000
Contribution margin	420000
Less: fixed costs	550000
Net loss	(130000)

Net loss : 130000

Part D

Degree of operating = (Sales - TVC) /(Sales-TVC-FC) =420000/-130000 = -3.23