(Break-even point). You are ahard-working analyst in the office of financial ope

Question

(Break-even point).  You are ahard-working analyst in the office of financial operations for a manufacturing firm that produces a single product.  You have developed the followng cost structure information for this company.  All of it pertains to an output level of 10 million units.  Using this information below, find hte break-even point in units of output for this firm.  Please show how you got your answer.  Thanks.  Return on operating assets = 25%, operating asset turnover = 5 times, Operating assets = $20 million and degree of operating leverage = 4 times.

Explanation / Answer

Number of Units =10,000,000 units Return onOperating Assets (ROA) = Net Income / Total Assets =25% Operating AssetTurnover = Sales / Total Assets = 5 times Operating Assets =$20,000,000 Operating Leverage = 4times CalculatingSales: Operating Asset Turnover= Sales / Operating Assets 5 times = Sales /$20,000,000 Sales = $20,000,000 * 5 Sales =$100,000,000 Sales per unit = TotalSales / Number of Units Sales per unit =$100,000,000 / 10,000,000 Sales per unit = $10 perunit Calculating NetIncome: ROA = Net Income / TotalAssets 0.25 = Net Income /$20,000,000 Net Income = $20,000,000 *0.25 Net Income =$5,000,000 Calculating Fixed Cost& Contribution: Degree of OperatingLeverage (DOL) = Contribution / Net Income Contribution = Net Income *DOL Contribution = $5,000,000 *4 Contribution =$20,000,000 Contribution per unit =$20,000,000 / 10,000,000 units Contribution per unit = $2per unit Fixed Cost = Contribution - NetIncome Fixed Cost = $20,000,000 -$5,000,000 Fixed Cost =$15,000,000 Calculating BEP (inunits); Break-Even Point (inunits) = Fixed Cost / Contribution per unit Break-Even Point (inunits) = $15,000,000 / 2 Break-Even Point(in units) = 7,500,000 units Number of Units =10,000,000 units Return onOperating Assets (ROA) = Net Income / Total Assets =25% Operating AssetTurnover = Sales / Total Assets = 5 times Operating Assets =$20,000,000 Operating Leverage = 4times CalculatingSales: Operating Asset Turnover= Sales / Operating Assets 5 times = Sales /$20,000,000 Sales = $20,000,000 * 5 Sales =$100,000,000 Sales per unit = TotalSales / Number of Units Sales per unit =$100,000,000 / 10,000,000 Sales per unit = $10 perunit Calculating NetIncome: ROA = Net Income / TotalAssets 0.25 = Net Income /$20,000,000 Net Income = $20,000,000 *0.25 Net Income =$5,000,000 Calculating Fixed Cost& Contribution: Degree of OperatingLeverage (DOL) = Contribution / Net Income Contribution = Net Income *DOL Contribution = $5,000,000 *4 Contribution =$20,000,000 Contribution per unit =$20,000,000 / 10,000,000 units Contribution per unit = $2per unit Fixed Cost = Contribution - NetIncome Fixed Cost = $20,000,000 -$5,000,000 Fixed Cost =$15,000,000 Calculating BEP (inunits); Break-Even Point (inunits) = Fixed Cost / Contribution per unit Break-Even Point (inunits) = $15,000,000 / 2 Break-Even Point(in units) = 7,500,000 units

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