Starbuck Products has fixed operating costs of $380,000, variable operating cost

Question

Starbuck Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit.

a. Calculate the operating breakeven point in units.
b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively.
c. With 10,000 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 10,000 units.

Explanation / Answer

Recall that" EBIT = ((Sales Price per Unit - Variable Cost per unit) x Units) - Fixed Cost Break Even Units = (Fixed Cost)/(Sales Price per Unit - Variable Cost per unit) Fixed Cost = $380,000 Variable Cost/Unit = $16.00 Sales/Unit = $63.50 Breakeven = 8,000 units Sales @ 9000 $571,500 Sales @ 10000 $635,000 Sales @ 11000 $698,500 EBIT @ 9000 $47,500 EBIT @ 10000 $95,000 EBIT @ 11000 $142,500 % change in Units 10000 to 9000 = -10% % change in EBIT 10000 to 9000 = -50% % change in Units 10000 to 11000 = 10% % change in EBIT 10000 to 11000 = 50% DOL = change in EBIT/change in units or sales DOL from 10000 to 9000 = 5.00 DOL from 10000 to 11000 = 5.00 So DOL @ 10000 is: 5.00

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