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    Break Even Point Calculation

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    (Break-even point) You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.

    Return on operating assets
    = 25%

    Operating asset turnover
    = 5 times

    Operating assets
    = $20 million

    Degree of operating leverage
    = 4 times

    © BrainMass Inc. brainmass.com December 24, 2021, 9:40 pm ad1c9bdddf
    https://brainmass.com/business/finance/break-even-point-calculation-402959

    SOLUTION This solution is FREE courtesy of BrainMass!

    We have following information...

    Return on operating assets = 25%
    Operating asset turnover = 5 times
    Operating assets = $20 million
    Degree of operating leverage = 4 times

    Operating Profit Margin (OPM)

    OPM = Operating Income / Sales

    (a) Formula: Return on operating assets = Income/Operating Assets
    Then 25% = Income/20
    Income = $5m

    (b) Formula: Operating Asset Turnover = Sale/Operating Assets
    Then 5 = Sales/20
    Sales = $100m

    So, OPM = 5/100 = 5%

    (c) Formula: Degree of Operating Leverage (DOL) = Contribution Margin Ratio / Operating Margin

    Then 4 = Contribution Margin Ratio/5%
    Contribution Margin Ratio = 4*5% = 20%

    So, we have Contribution Margin (CM) = Contribution Margin Ratio * Sales
    CM = 20%*100 = $20m

    Now we have,

    Sales = $100m, Contribution Margin = $20m, Operating Income = $5m

    Then Fixed Cost = Contribution Margin - operating income
    Fixed Cost = 20 - 5 = $15m

    Sale price per unit = $100/10 = $10

    Contribution Margin per unit = $10*20% = $2

    We know,

    Breakeven point (BEP) = Fixed Cost/Contribution per unit
    BEP = 15/2 = 7.5m or 7,500,000

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 9:40 pm ad1c9bdddf>
    https://brainmass.com/business/finance/break-even-point-calculation-402959

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