15-13A. (Break-even point and operating leverage) Allison Radios manufactures a

Question

15-13A. (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

Breakeven in units= Fixed Costs/ Variable margin per unit a)540,000/(180-126)= 10,000 units b)10,000* 180= $1,800,000 c) 12,000* (180-126)- 540,000= $108,000 15,000(180-126)- 540,000= $270,000 20,000(180-126)- 540,000 = $540,000 Degree of operating leverage= Contribution Margin/Net Income 648,000/108,000= 6 810,000/270,000= 3 1,080,000/540,000= 2

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