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Finding the Break-Even Point in Units and Operating Leverage

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1) (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

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

a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve in order to reach the break-even
point?
c. What would be the firm's profit or loss at the following units of production sold:
12,000 units? 15,000 units? 20,000 units?
d. Find the degree of operating leverage for the production and sales levels given in part (c).

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Solution Preview

1) (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

Return on operating assets=Net income/Total operating assets
Net income=Return on operating assets*Total operating assets
Net income=$20,000,000*.25=$5,000,000

Operating asset turnover=Net sales/Total operating assets
Net sales=Operating asset turnover*Total operating assets
Net sales=$20,000,000*5=$100,000,000

Degree of operating ...

Solution Summary

The solution explains step-by-step the details of how to find break-even points and operating leverage.

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