Allison Radios manufactures a complete line of radio and communication equipment

Question

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

Cont pu = SP pu - VC pu = 180-126 = 54 a. What is the break-even point in units for the company? BEP = FC/COnt pu = 540,000/54 = 10,000 b. What is the dollar sales volume the firm must achieve in order to reach the break-even point? BEP in $$$ = BEP units *Sale price = 10,000*$180 = $1800,000 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: At 12000, Total COnt = 12000*$54 = $648,000 Profit = Total COnt - FC = $648,000-540,000 = 108,000 At 15000, Total COnt = 15000*$54 = $810,000 Profit = Total COnt - FC = $810,000-540,000 = 270,000 At 20000, Total COnt = 20000*$54 = $1080,000 Profit = Total COnt - FC = $1080,000-540,000 = 540,000 d. Find the degree of operating leverage for the production and sales levels given in part c. DoL = %change in EBIT/%change in Sales 1. For change in units from 12000 to 15000 DoL = (270000-108000)/(180*(15000-12000)) = 30.00% 2. For change in units from 15000 to 20000 DoL = (540000-270000)/(180*(20000-15000)) = 30.00%

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