( Break-even point and operating leverage ) AllisonRadios manufactures a complet

Question

(Break-even point and operating leverage) AllisonRadios manufactures a complete line of radio and communicationequipment for law enforcement agencies. The average selling priceof its finished product is $180 per unit. The variable cost forthese same units is $126. Allison Radios incurs fixed costs of$540,000 per year.

a. What is the break-even point in units forthe company?

b. What is the dollar sales volume the firmmust achieve in order to reach the break-even point?

c. What would be the firm’s profit orloss at the following units of production sold:

12,000 units? 15,000 units? 20,000 units?

Explanation / Answer

a. Break-even points in units Fixed cost contribution margin = 540,000     180-126 =10,000 units b.dollar sales volume 10,000*180 =$1,800,000 c.12,000 units sales       2,160,000 -vc         1,512,000 -fc            540,000 profit         108,000 at 15,000 units Sales         2,700,000 -vc           1,890,000 -fc 540,000 Profit          270,000 at 20,000 units Sales       3,600,000 -vc         2,520,000 -fc            540,000 Profit        540,000 d. Degree of operating leverage 12,000 unit level Sales- variable cost Sales-vc-fc 648,000 / 108,000 DOL = 6 15,000 unit level 810,000 / 270,000 = 3 20,000 unit level 1,080,000 / 540,000 =2

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