Question

Cantor Products sells a product for $90. Variable costs per unit are $33, and monthly fixed costs are $210,900.

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

b. What unit sales would be required to earn a target profit of $513,000?

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

Solution a:

Contribution margin per unit = Selling price - Variable cost = $90 - $33 = $57 per unit

Break even point in units = Fixed costs / CM per unit = $210,900 / $57 = 3700 units

solution b:

Units sales required to earn target profit = (Fixed costs + Target profit) / CM per unit

= ($210,900 + $513,000) / $57

= 12700 units

Solution c:

Degree of operating leverage = Contribution margin / Net operating income
= $723,900 / $513,000 = 1.411

Solution d:

If sales decrease by 30%, then percentage decrease in profits= % decrease in sales * Degree of operating leverage

= 30% * 1.411 = 42.33%