(Break-even point and operating leverage) Allison Radios manufactures a complete
ID: 2663710 • Letter: #
Question
(Break-even point and operating leverage) Allison Radios manufactures a complete line of radio and communication equipment for law enforcement agencies. The average selling price of its finished product is $180 per unit. The variable cost for these same units is $126. Allison Radios incurs fixed costs of $540,000 per year.a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve in order to reach the break-even point?
c. What would be the firm’s profit or loss at the following units of production sold:
12,000 units? 15,000 units? 20,000 units?
d. Find the degree of operating leverage for the production and sales levels given in part (c).
Explanation / Answer
selling price of $180 per unit variable cost $126 Contribution $ 54 per unit fixed costs of $540,000 per year. a. What is the break-even point in units for the company? Breakeven in Unit = Fixed Cost ÷ Contribution per unit = $540,000 ÷ $54 = 10,000 units b. What is the dollar sales volume the firm must achieve in order to reach the break-even point? Breakeven in Dollars = (Fixed Cost ÷ Contribution per unit) x Sales Price per unit = ($540,000 ÷ $54) x $180 = $1,800,000 c. What would be the firm’s profit or loss at the following units of production sold: 12,000 units 15,000 units 20,000 units Sales Value $2,160,000 $2,700,000 $3,600,000 Variable cost $1,512,000 $1,890,000 $2,520,000 Contribution $ 648,000 $ 810,000 $1,080,000 Fixed cost $ 540,000 $ 540,000 $540,000 Profit $ 108,000 $ 270,000 $540,000 d. Find the degree of operating leverage for the production and sales levels given in part (c). Operating leverage = Fixed Cost / Total cost 12,000 units 15,000 units 20,000 units Operating leverage = 540/ 2052 540 / 2430 540/ 3060 = 0.263 0.222 0.176
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