(Break-even point) You are a hard-working analyst in the office of financial ope
ID: 2663689 • Letter: #
Question
(Break-even point) You are a hard-working analyst in the office of financial operations
for a manufacturing firm that produces a single product. You have developed the following cost
structure information for this company. All of it pertains to an output level of 10 million units.
Using this information, find the break-even point in units of output for the firm.
Return on operating assets = 25%
Operating asset turnover = 5 times
Operating assets = $20 million
Degree of operating leverage = 4 times
Explanation / Answer
Return on operating assets= net income / operating assets 25%= net income / 20 million net income= 20 million*25% =5 million degree of operating leverage = contribution / net income 4 times=contribution / 5 million contribution=4 times * s million =20 million operating asset turnover ratio= sales / operating assets 5 times = sales / 20 million sales= 20 million * 5 times =100 million CONTRIBUTION= SALES - VARIABLECOST 20 million =100- v v=80 million marginal costing standard formula sales-variable cost = fixed cost + profit fixed cost=sales-variable cost - profit fixed cost = 100-80-5 =15 million therefore BREAK EVEN POINT = FIXED COST / CONTRIBUTION =15 million/ 20 million =0.75million units. The break even point units for this firm = 0.75 million units.
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