(Break even point and operating Leverage) Allison Radios manufactures a complete
ID: 2661864 • Letter: #
Question
(Break even point and operating Leverage) Allison Radios manufactures a complete line of radio andcommunication equipment for law enforcement agencies. The averageselling price of its finished product is $180 per unit. Thevariable cost for these same units is $126. Allison radios incursfixed costs of $540,000 per year. a. What is the break even point in units for thecompany? b. What is the dollar sales volume the firm must achieve inorder to reach the break even point? c. What would be the firms profit and loss at the followingunits of production sold: 12,000 units? 15,000 units? 20,000units? d. Find the degree of operating leverage for the productionand sales levels given in part (c). (Break even point and operating Leverage) Allison Radios manufactures a complete line of radio andcommunication equipment for law enforcement agencies. The averageselling price of its finished product is $180 per unit. Thevariable cost for these same units is $126. Allison radios incursfixed costs of $540,000 per year. a. What is the break even point in units for thecompany? b. What is the dollar sales volume the firm must achieve inorder to reach the break even point? c. What would be the firms profit and loss at the followingunits of production sold: 12,000 units? 15,000 units? 20,000units? d. Find the degree of operating leverage for the productionand sales levels given in part (c).Explanation / Answer
Selling Price per unit = $180 per unit Variable Cost per unit = $126 perunit Fixed Costs = $540,000 per year (a) Calculating Break-EvenPoint in units: Break-Even Point (inunits) = Fixed Cost / Contribution per unit Contribution per unit = Sales per unit- Vairable Cost per unit Contribution per unit = $180 -$126 = $54 Break-Even Point (in units) = $540,000/ $54 Break-Even Point (inunits) = 10,000 units (b) Calculating Break-EvenSales Volume: Break-Even Sales Volume = Fixed Cost /(P/V Ratio) P/V Ratio = Contribution per unit /Sales per unit P/V Ratio = $54 / $180 = 0.3 (or)30% Break-Even Sales Volume = $540,000 /0.3 Break-Even Sales Volume = $1,800,000 ( c) Calculating ProfitAmount: Profit = (Sales * Contribution) - Fixed Cost Profit = (12,000 * $54) -$540,000 = $108,000 Profit = (15,000 * $54) -$540,000 = $270,000 Profit = (20,000 * $54) -$540,000 = $540,000 (d) Calculating Degree ofOperating Leverage (DOL): DOL = $540,000 / [($126 * 12,000) +$540,000] DOL = $540,000 / $2,052,000 DOL = 0.2631 (or) 26.31% DOL = $540,000 / [($126 * 15,000) +$540,000] DOL = $540,000 / $2,430,000 DOL = 0.2222 (or) 22.22% DOL = $540,000 / [($126 * 20,000) +$540,000] DOL = $540,000 / $3,060,000 DOL = 0.1764 (or) 17.64% Selling Price per unit = $180 per unit Variable Cost per unit = $126 perunit Fixed Costs = $540,000 per year (a) Calculating Break-EvenPoint in units: Break-Even Point (inunits) = Fixed Cost / Contribution per unit Contribution per unit = Sales per unit- Vairable Cost per unit Contribution per unit = $180 -$126 = $54 Break-Even Point (in units) = $540,000/ $54 Break-Even Point (inunits) = 10,000 units (b) Calculating Break-EvenSales Volume: Break-Even Sales Volume = Fixed Cost /(P/V Ratio) P/V Ratio = Contribution per unit /Sales per unit P/V Ratio = $54 / $180 = 0.3 (or)30% Break-Even Sales Volume = $540,000 /0.3 Break-Even Sales Volume = $1,800,000 ( c) Calculating ProfitAmount: Profit = (Sales * Contribution) - Fixed Cost Profit = (12,000 * $54) -$540,000 = $108,000 Profit = (15,000 * $54) -$540,000 = $270,000 Profit = (20,000 * $54) -$540,000 = $540,000 (d) Calculating Degree ofOperating Leverage (DOL): DOL = $540,000 / [($126 * 12,000) +$540,000] DOL = $540,000 / $2,052,000 DOL = 0.2631 (or) 26.31% DOL = $540,000 / [($126 * 15,000) +$540,000] DOL = $540,000 / $2,430,000 DOL = 0.2222 (or) 22.22% DOL = $540,000 / [($126 * 20,000) +$540,000] DOL = $540,000 / $3,060,000 DOL = 0.1764 (or) 17.64%Related Questions
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