Question

(Operating leverage​) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for​ high-performance engines. The average selling price for the various units is ​$700. The associated variable cost is ​$300 per unit. Fixed costs for the firm average $ 170, 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, 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 30 percent from the volume noted in part c​?

Answer 1

a)contribution per unit =price-variable cost

= 700 -300

= $ 400 per unit

Breakeven point in units =Fixed cost /contribution per unit

= 170000 /400

= 425 units

b)contribution margin ratio =contribution /sales

= 400/700

= .57143

Breakeven point ($) =Fixed cost /Contribution margin ratio

= 170000/.57143

= $ 297500 rounded

c)

Contribution (5000*400)	2000000
less:Fixed cost	-170000
net income	1830000

Degree of operating leverage =contribution /net income

= 2000000/1830000

= 1.093

d)Increase in earning before interest and tax =Increase in sales * operating leverage

= 30%*1.093

= .3279 or 32.79%