Operating Leverage

QUESTION

(Operating leverage) Rocky Mount Metals Company manufacturers an assortment of wood-burning stoves. The average selling price for the various units is $500. The associated variable cost is $350 per unit. Fixed costs for the firm average $180,000 annually.a. What is the break-even point in units for
Cont pu = Sales price pu Var cost pu = 500-350 = 150 BEP = Fixed costs/Cont pu = 180,000/150 = 1200 units(a) Dollar Sales volume = No of units at BEP * UNit Sale price = 1200*$500 = $600,000.(b) degree of operating leverage (DOL) = Total Cont/(Total Cont Fixed costs) So for 5000 units of sale, Total COnt = No of units * Cont pu DOL

= 5000*$150/(5000*$150 180,000) = 1.316 (c) DOL = %change in EBIT/%Change in sales ie 1.316 = %change in EBIT/20% So %Change in EBIT = 1.316*20% = 26.32% If firms sale inc by 20%, %Change in EBIT will be 26.32%..(d)

ANSWER:

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