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Operating Leverage and Breakeven

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Problem 13-10

Otis Day's company manufactures and sells men's suits. His trademark gray flannel suits are popular on Wall Street and in boardrooms throughout the East. Each suit sells for $800. Fixed costs are $200,000 and variable costs are $250 per suit.

a. What is the firm's operating income on sales of 600 suits? On sales of 3,000 suits?

b. What is Mr. Day's degree of operating leverage (DOL) at a sales level of 600 suits? At a sales level of 3,000 suits?

c. Calculate Mr. Day's breakeven point in sales units and sales dollars.

d. If the cost of the gray flannel material increases so that Mr. Day's variable costs are now $350 per suit, what will be his new breakeven point in sales units and sales dollars?

e. Considering the increase in variable costs, by how much will he need to increase the selling price per suit to reach the original operating income for sales of 3,000suits calculated in part a?

Solution Preview

In this question
Selling Price per unit = $800
Variable Cost per unit = $250
Contribution Margin per unit = 800-250=550
Fixed Cost = 200,000

a. What is the firm's operating income on sales of 600 suits? On sales of 3,000 suits?

Operating Income = Sales - Variable Cost - Fixed Cost
= Contribution Margin - Fixed Cost
At 600 suits
Operating Income= 550X600-200,000=130,000
At 3,000 suits
Operating Income = ...

Solution Summary

The solution explains how to calculate the degree of operating leverage and the breakeven point

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