(break even point) You are a hard working analyst in theoffice of financial oper

Question

(break even point) You are a hard working analyst in theoffice of financial operations for a manufacturing firm thatproduces a single product. You have developed the following coststructure for this company. All of it pertains to an output levelof 10 million units. Using this info, find the break even point inunits of output for the firm. Return on operating assets=25% Operating Asset Turnover =5 times Operating assets =$20 million Degree of operating leverage= 4 times (break even point) You are a hard working analyst in theoffice of financial operations for a manufacturing firm thatproduces a single product. You have developed the following coststructure for this company. All of it pertains to an output levelof 10 million units. Using this info, find the break even point inunits of output for the firm. Return on operating assets=25% Operating Asset Turnover =5 times Operating assets =$20 million Degree of operating leverage= 4 times

Explanation / Answer

Number of Units = 10,000,000 units Return on Operating Assets(ROA) = Net Income / Total Assets = 25% Operating AssetTurnover = Sales / Total Assets = 5 times Operating Assets = $20,000,000 Operating Leverage = 4 times Calculating Sales: Operating Asset Turnover = Sales /Operating Assets 5 times = Sales / $20,000,000 Sales = $20,000,000 * 5 Sales = $100,000,000 Sales per unit = Total Sales / Numberof Units Sales per unit = $100,000,000 /10,000,000 Sales per unit = $10 per unit Calculating Net Income: ROA = Net Income / Total Assets 0.25 = Net Income / $20,000,000 Net Income = $20,000,000 * 0.25 Net Income = $5,000,000 Calculating Fixed Cost &Contribution: Degree of Operating Leverage (DOL) =Contribution / Net Income Contribution = Net Income * DOL Contribution = $5,000,000 * 4 Contribution = $20,000,000 Contribution per unit = $20,000,000 /10,000,000 units Contribution per unit = $2 per unit Fixed Cost = Contribution - Net Income Fixed Cost = $20,000,000 - $5,000,000 Fixed Cost = $15,000,000 Calculating BEP (in units); Break-Even Point (inunits) = Fixed Cost / Contribution per unit Break-Even Point (inunits) = $15,000,000 / 2 Break-Even Point (inunits) = 7,500,000 units Number of Units = 10,000,000 units Return on Operating Assets(ROA) = Net Income / Total Assets = 25% Operating AssetTurnover = Sales / Total Assets = 5 times Operating Assets = $20,000,000 Operating Leverage = 4 times Calculating Sales: Operating Asset Turnover = Sales /Operating Assets 5 times = Sales / $20,000,000 Sales = $20,000,000 * 5 Sales = $100,000,000 Sales per unit = Total Sales / Numberof Units Sales per unit = $100,000,000 /10,000,000 Sales per unit = $10 per unit Calculating Net Income: ROA = Net Income / Total Assets 0.25 = Net Income / $20,000,000 Net Income = $20,000,000 * 0.25 Net Income = $5,000,000 Calculating Fixed Cost &Contribution: Degree of Operating Leverage (DOL) =Contribution / Net Income Contribution = Net Income * DOL Contribution = $5,000,000 * 4 Contribution = $20,000,000 Contribution per unit = $20,000,000 /10,000,000 units Contribution per unit = $2 per unit Fixed Cost = Contribution - Net Income Fixed Cost = $20,000,000 - $5,000,000 Fixed Cost = $15,000,000 Calculating BEP (in units); Break-Even Point (inunits) = Fixed Cost / Contribution per unit Break-Even Point (inunits) = $15,000,000 / 2 Break-Even Point (inunits) = 7,500,000 units

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