Question

Degree of operating leverage Grey Products has fixed operating costs of $373,000, variable operating costs of $16.55 per unit, and a selling price of $63.45 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm's EBIT at 11,000, 13,000, and 15,000 units, respectively. c. With 13,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part (b)? d. Use the percentages computed in part (c) to determine the degree of operating leverage (DOL). e. Use the formula for degree of operating leverage to determine the DOL at 13,000 units.

Answer 1

a.
Operating break even point in units:
Formula:
Q(P-V)-FC = 0
Q quantity
P selling price per unit
V variable cost per unit
FC fixed cost

Q x(63.45-16.55)-373,000=0
Q= 7953.1
Q= 7954

b,c,d = Refer notes attached.

e. Degree of operating leverage= contribution/EBIT = 609700/236700= 2.576

DOL = 2.576

b) EBIT calculations! 13,000 11,000 15,000 951,750 697, 950 824850 sales (63.45xQ) 215,150 248, 250 - Vanavlecost 182,050 (16.55x0) Contribution 515,900 609,700 703, 500 - Fixed cost 373,000 3+3,000 373,000 236, too 330,500 EBIT 1142,900 (Earnings before intreet & tax) Answer of 6 © Change 142,900 -236, Toox Looy. 236, too 330,500 - 236,700 236, too x 100 EBIT 21-39-63%. (Aus) ③ = 39.63%. (Ans) f. change 11,000-13,000 Xlody. 13,000 15,000-13,000 13,0vo loo in sales = - 15.394. = + 15-39% 3 .63 9.576 @ DOL = %. change in EBIT = to change in sales 15-39 Insenes of @