Question

Motorola Company manufactures smartphones, generally selling from 200,000 to 300,000 units per year. The following cost data apply to the activity levels shown: Number of Units 200,000 250.000 300.000 Total costs Fixed $ 15,000,000 Variable 24,000,000 Total costs 39,000,000 Cost per Unit Fixed $ 75 Variable 120 Total Cost per unit $ 195 Required: 1. Complete the preceding table by filling the missing amounts for 250,000 and 300,000 units. 2. Assume that Motorola actually makes 280,000 units. What would be the total costs and the cost per unit at this level of activity? (Round the cost per unit to two decimal points.) 3. If Motorola sells each unit for $220, what is Phoenix's magnitude of operating leverage at sales of 280,000 units? (Round to two decimal points.)

Answer 1

1.The table is completed as follows:

Working note:

200,000 250,000 300,000 Number of Units Total costs Fixed Variable Total costs $15,000,000 $24,000,000 $39,000,000 $15,000,000 $15,000,000 $30,000,000 $36,000,000 $45,000,000 $51,000,000

Fixed costs remains same for all level of units

Variable cost is computed as;

(200,000*120)=$24,000,000

(250,000*120)=$30,000,000

(300,000*120)=36,000,000

2.3.Operating leverage=Contribution/Net Income

Total costs at 280,000 units Fixed cost $15,000,000 Variable cost(280,000*$120) $33,600,000 Total costs $48,600,000 Cost per unit($48,600,000/280,000) $173.57

Net Income=Sales-Total costs

Net Income=(280,000*220)-$48,600,000

Net Income=$61,600,000-$48,600,000

Net Income=$13,000,000
Contribution per unit=Selling price per unit-Variable cost

Contribution per unit=$220-$120=$100

Contribution=280,000*$100=$28,000,000

Operating leverage=$28,000,000/$13,000,000

Operating leverage=2.15