ABC Corp produces gizmos that sell for $60/unit. Variable cost is $35/unit. Annu
ID: 2571696 • Letter: A
Question
ABC Corp produces gizmos that sell for $60/unit. Variable cost is $35/unit. Annual fixed costs are $150,000. Annual depreciation charges are $50,000. 1. What is the accounting (or, operating) breakeven of level of sales? 2. What is the cash breakeven level of sales? 3. Compute the Degree of Operating Leverage (DOL) between sales levels of 20,000 and 24,000 units.ABC Corp produces gizmos that sell for $60/unit. Variable cost is $35/unit. Annual fixed costs are $150,000. Annual depreciation charges are $50,000. 1. What is the accounting (or, operating) breakeven of level of sales? 2. What is the cash breakeven level of sales? 3. Compute the Degree of Operating Leverage (DOL) between sales levels of 20,000 and 24,000 units.
ABC Corp produces gizmos that sell for $60/unit. Variable cost is $35/unit. Annual fixed costs are $150,000. Annual depreciation charges are $50,000. 1. What is the accounting (or, operating) breakeven of level of sales? 2. What is the cash breakeven level of sales? 3. Compute the Degree of Operating Leverage (DOL) between sales levels of 20,000 and 24,000 units.
Explanation / Answer
1. What is the accounting (or, operating) breakeven of level of sales?
BEP in units = Fixed Cost / Contribution margin
= 150000 / (60-35)
= 150000/25
= 6000 units
(Note: BEP in sales $ = 6000 x 60 = $360,000)
2. What is the cash breakeven level of sales?
BEP in units = Fixed Cost(Cash) / Contribution margin
= (150000-50000)/25
= 100000/25
= 4000 units
3. Compute the Degree of Operating Leverage (DOL) between sales levels of 20,000 and 24,000 units.
DOL at 20,000 units
DOL = Q(P-VC)/ [Q(P-VC)- FC]
DOL = 20000(60-35)/[20000(60-35)-150000]
DOL = 500000/350000
DOL = 1.42857
DOL at 24,000 units
DOL = Q(P-VC)/ [Q(P-VC)- FC]
DOL = 24000(60-35)/[24000(60-35)-150000]
DOL = 600000/450000
DOL = 1.33333
Note: Leverage goes down because we are further away from the break-even point, thus the firm is operating on a larger profit base and leverage is reduced
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