SUNY Package Service (SUNYPS) offers overnight package delivery to Canadian busi
ID: 1190365 • Letter: S
Question
SUNY Package Service (SUNYPS) offers overnight package delivery to Canadian business
customers. SUNYPS has recently decided to expand its facilities to better satisfy current and
projected demand. Current volume totals two million packages per week at a price of $15 each,
and average variable costs are constant at all output levels. Fixed costs are $3 million per week,
and profit contribution averages one-third of revenues on each delivery. After completion of the
expansion project, fixed costs will double, but variable costs will decline by 20%.
a). Calculate the change in SUNYPS’s weekly breakeven output level that is due to expansion.
b). Assuming that volume remains at two million packages per week, calculate the change in the
degree of operating leverage that is due to expansion.
Explanation / Answer
Revenues = current volume * price = 2 million * 15 = $30 million per week
Fixed cost = $3 million per week
Profit = revenue * 1/3 = $30 million / 3 = $10 million per week
variable costs = revenues - fixed cost - profit
= 30 - 3 - 10 = $17 million per week
fixed cost per unit = 3 million / 2 million = $1.5 per package
Variable cost per unit = $17 million / 2 million = $8.5 per unit
contribution per unit = selling price per unit - variable cost per unit
= 15 - 8.5 = $6.5 per unit
current Break even output = fixed costs / contribution per unit
= 3 million / 6.5 = 461,538.46 units or 461,538 units
after completion of the project:
Fixed costs = $3 million *2 = $6 million
Variable cost per unit = 8.5 * 0.80 = $6.80
contribution per unit = selling price per unit - variable cost per unit
= 15 - 6.8 = $8.20 per unit
total variable costs = 2 million units * 6.8 = $13.6 million
new Break even output = fixed costs / contribution per unit
= 6 million / 8.20 = 731,707.32 units or 731,707.0 units
absolute Change in break even output = new break even - old breakeven
= 731,707.32 - 461,538.46 = 270,168.86 units
% change in the break even output = (731,707.32 - 461,538.46) / 461,538.46 = 58.5%
b)
Previous degree of operating leverage = (sales - variable cost) / ( sales -variable cost - fixed cost)
= (30 - 17) / (30-17-3)
= 13/ 10 = 1.30
new Degree of operating leverage = ( 30 - 13.6)/ ( 30 - 13.6 - 6)
= 16.4 / 10.4 = 1.58
Absolute change in leverage = 1.58 - 1.30 = 0.28
% Change in leverage = (1.58 - 1.30) / 1.30 = 21.30%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.