Question

The Newcastle Utility Company has fixed costs of $20,000 per month and sells electricity for $0.015 per kilowatt-hour. It costs them $0.005 per kilowatt-hour to produce the electricity. a) What is Newcastle’s break-even point? (2,000,000 units per month). b) What is Newcastle’s DOL at sales level of 2,750,000 kilowatt-hours? (DOL=3.6667)

Answer 1

Given in the question,

Fixed cost= 20000

variable cost per unit(kilowatt-hour)= 0.005

Selling price per unit (kilowatt-hour)= 0.015

a. Formula to calculate breakeven point= Fixed Cost/(sales price per unit-variable cost per unit)

Putting the values, we get

Break-even point (unit) =20000/(0.015-0.005)=20000/0.01

Break-even point (units)= 2000000

b. Formula to calculate DOL (Degree of operating leverage) is as

DOL = [Quantity x (sales Price – Variable Cost per Unit)] / [Quantity x (Sales Price – Variable Cost per Unit) – Fixed Costs]

We have to calculate DOL at Quantity =2750000 kilowatt-hours

Putting the value , we get

=(2750000*(0.015-0.005)]/[2750000*(0.015-0.005)-20000]=27500/7500

DOL=3.6667