(Operating leverage) Rocky Mount Metals Company manufacturers an assortment of w
ID: 2664029 • Letter: #
Question
(Operating leverage) Rocky Mount Metals Company manufacturers an assortment of wood-burning stoves. The average selling price for the various units is $500. The associated variable cost is $350 per unit. Fixed costs for the firm average $180,000 annually.a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage for a production and sales level of 5,000 units for the firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest and taxes if the firm’s sales level should increase by 20% from the volume noted in part c?
Explanation / Answer
Cont pu = Sales price pu - Var cost pu = 500-350 = 150 BEP = Fixed costs/Cont pu = 180,000/150 = 1200 units......(a) Dollar Sales volume = No of units at BEP * UNit Sale price = 1200*$500 = $600,000....(b) degree of operating leverage (DOL) = Total Cont/(Total Cont - Fixed costs) So for 5000 units of sale, Total COnt = No of units * Cont pu DOL = 5000*$150/(5000*$150 - 180,000) = 1.316 ......(c) DOL = %change in EBIT/%Change in sales ie 1.316 = %change in EBIT/20% So %Change in EBIT = 1.316*20% = 26.32% If firms sale inc by 20%, %Change in EBIT will be 26.32%...........(d)
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