(Operating leverage) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems...
(Operating leverage) The C. M. Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $650. The associated variable cost is $250 per unit. Fixed costs for the firm average $ 170,000 annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage for a production and sales level of 6,000 units for the firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest and taxes if the firm's sales level should increase by 35 percent from the volume noted in part c?
Homework Answers
a. What is the break-even point in units for the
company?
=170000/(650-250)
=425
b. What is the dollar sales volume the firm must achieve to
reach the break-even point?
=425*650
=276250
c. What is the degree of operating leverage for a production and
sales level of 6,000 units for the firm? (Calculate to three
decimal places.)
=6000*(650-250)/(6000*(650-250)-170000)
=1.076233184
d. What will be the projected effect on earnings before interest
and taxes if the firm's sales level should increase by 35 percent
from the volume noted in part c?
% increase in EBIT =1.076233184*35%
=37.67%
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