Question

The C&D TV store currently has fixed costs of $6,000 per month and $400 per TV set. Their sales price for the TV sets is $700 each, and their current volume is 25 sets per month.

            a) Find C&D’s break-even point and their NOI and DOL at the current level of sales (20 units per month, NOI=$1,500, and DOL=5).

            b) Find C&D’s break-even point and their NOI and DOL if fixed costs decrease to $4,750 and at the same time the cost of TV sets rises to $450 (19 units per month, NOI=$1,500, and DOL=4.1667).

Answer 1

Sale price of a TV = 700

Variable cost of a TV = 400

Hence, total contribution of a TV = 700-400 = 300

Break even point is where the total contribution matches with the fixed cost = 6000/300 = 20 units

NOI ( Net operating income) = total contribution - total fixed costs

Since contribution per TV is 300 and At monthly volume of 25 units, total contribution is 300*25 = 7500

NOI = 7500-6000 = 1500

DOL ( Degree of operating leverage) = total contribution/net operating income = 7500/1500 = 5

In second case,

Fixed cost =4750

Variable cost = 450

Sale price = 700

Contribution per TV = 700-450=250

Break even point = fixed costs/contribution = 4750/250 = 19

NOI @ 25 units per month,

Total contribution= 25*250 = 6250

NOI = total contribution - fixed cost = 6250-4750 = 1500

DOL = 6250/4750 = 4.166667