6. Heat Tamers, Inc., of Bend, Oregon produces special heat-resistant boots used
ID: 1195343 • Letter: 6
Question
6. Heat Tamers, Inc., of Bend, Oregon produces special heat-resistant boots used primarily by firefighters, smoke-jumpers and steelworkers. It is contemplating an expansion into the heat resistant leather market charging a price of $150 per pair of boots. The production of each pair of boots would require $60 in materials; 1.5 hours of labor at the rate of $20 per hour; and energy, supervisory & other variable overhead costs would amount to $25 per unit. The accounting department has derived an allocated fixed overhead charge of $30 per pair of boots (at a projected volume of 280,000 pairs).
A) What is Heat Tamers' breakeven sales volume (in pairs) for heat-resistant boots?
B) Calculate the degree of operating leverage at a projected volume of 280,000 units.
C) Interpret the DOL value you found in part B.
Explanation / Answer
A)
Total overhead cost of production of 280,000 pairs = $30 x 280,000 = $8,400,000
Total variable cost = (60 + (1.5*20) + 25)x = 115x =(60 + 30 + 25)x = 115x
Market price = $150 per pair
Total revenue (or Sales) = 150x
Break-even sales 'x' can be calculated where, Total revenue = Total variable costs + Total overhead costs
150x = 8,400,000 + 115x
x = 240,000
B) For this part, we assume x = 280,000 units.
sales variable costs = ($150 x 280,000) - (115 x 280,000) = $9,800,000
sales variable costs fixed costs = ($150 x 280,000) - (115 x 280,000) - $8,400,000 = $1,400,000
DOL = $9,800,000/$1,400,000 = 7
C) Degree of operating leverage (DOL) indicates the change in operating income of a business in response to a given percentage change in sales. A high DOL implies that a small change in sales can increase the operating profit.
Degree of operating leverage = sales variable costs sales variable costs fixed costsRelated Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.