The following is from Alsatia Corporation\'s financial statement information for
ID: 2718462 • Letter: T
Question
The following is from Alsatia Corporation's financial statement information for last month:
Sales $1,400,000
Variable Expenses 900,000
Fixed Expenses 300,000
The company has no beginning or ending inventories and produced and sold 10,000 units during the month.
A) What is the company's break-even in units?
B) How many units would the company have to sell to attain target profits of $225,000?
C) What is the company's degree of operating leverage?
SHOW ALL WORK. ANSWER ALL PARTS
Explanation / Answer
A)
Contribution Margin = Sales – Variable Expenses = $1,400,000 - $900,000 = $500,000
Contribution margin per unit = $500,000 / 10,000 = $50 per unit
Break even in units = Fixed expenses / Contribution margin per unit = $300,000 / $50 = 6,000 units
B)
Target profit = $225,000
Required contribution margin = Fixed Expenses + Target profit = $300,000 + $225.000 = $525,000
Units to be sold = $525,500 / $50 = $10,500
C)
Operating Income of the company = Contribution margin – Fixed expenses = $500,000 - $300,000 = $200,000
Degree of operating leverage = Contribution margin / Operating income = $500,000 / $200,000 = 2.5
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