Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed expenses associated with the new product are budgeted at $450,000 for the year. The variable expenses of the new product are $16 per unit.

Required:

a. How many units of the new product must Delphi sell during the next fiscal year in order to break even on the product?

b. What is the profit Delphi would earn on the new product if all of the manufacturing capacity allocated by management is used and the product is sold for $36 per unit?

c. What is the degree of operating leverage for the new product if 25,000 units are sold for $36 per unit?

d. The Marketing Department would like more manufacturing capacity to be devoted to the new product. What would be the percentage increase in net operating income for the new product if its unit sales could be expanded by 10% without any increase in fixed expenses and without any change in the unit selling price and unit variable expense?

e. Delphi's management has stipulated that the new product must earn a profit of at least $125,000 in the next fiscal year. What unit selling price would achieve this target profit if all of the manufacturing capacity allocated by management is used and all of the output can be sold at that selling price?

Solution Summary

Solution contains calculation of break even point and the degree of operating leverage in an attached Excel spreadsheet.

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