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Calculating break even sales & degree of operating leverage

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Degree of Operating Leverage. DynaLinear, Ltd., produces digital-to-analog converters for compact disk players used by radio stations and audio enthusiasts. It is contemplating an expansion into the moderately-priced home audio market by producing a CD player that would sell at a price of $300. The production of each CD player would require $100 in materials, and 3.75 hours of labor at the rate of $20 per hour for wages and fringe benefits plus variable overhead tied to labor. Energy, supervisory and other variable overhead costs would amount to $50 per unit. The accounting department has derived an allocated fixed overhead charge of $25 per CD player (at a projected volume of 14,000 units) to account for the expected increase in fixed costs.

A. What is DynaLinear's break even sales volume (in units) for home audio CD players?
B. Calculate the degree of operating leverage at a projected volume of 14,000 units and explain what the DOL means.

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Solution Preview

A. What is DynaLinear's breakeven sales volume (in units) for home audio CD players?

Price of CD player=P=$300
Variable Cost per unit=V=Material Cost+ labor cost=100+3.75*20=$175
Fixed costs are allocated at $25 per unit on a projected volume ...

Solution Summary

Solution depicts the steps to find out break even sales volume and degree of operating leverage at the given activity level.