My company makes and sells golf cart tires at $95.25 each. His fixed operating c

Question

My company makes and sells golf cart tires at $95.25 each. His fixed operating costs are $570,000 and his variable operating costs are $24.

a) detemine the number of units he needs to rech the operating breakeven point.

b) What is the EBIT at

1) 13,5000 tires,

2) 15,000 tires,

3) 16,500 tires,

c) use 15,000 tires as the base and determine the % change in tires sold and the change in EBIT as his tire sales go from the 15,000 base to the 13,500 level and the 16,500 level.

d) Now that you have found the % changes, provide him with his DOL (degree of Operating Leverage)

Explanation / Answer

At selling price = cost price , they reach breakeven point

let x be number of units

95.25x = 570000 + 24x

71.25x = 570000

x = 8000

1) EBIT = revenue - cost

= 95.25*13500 - 570000 - 24*13500

= 391875

2) EBIT = 71.25*15000 - 570000 = 498750

3) EBIT = 71.25*16500 - 570000 = 605625

c) % change in tires sold = (13500-15000)/15000 = -10%

% change in EBIT = (391875 - 498750)498750 = 106875/498750 = - 21.4%

% change in tires sold = (16500-15000) = 1500/15000 = 10%

% change in EBIT = 605625 - 498750 = 106875/498750 = 21.4%

d) DOL = % change in EBIT / % change in sales = 21.4/10 = 2.14

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