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The following is from Alsatia Corporation\'s financial statement information for

ID: 2718462 • Letter: T

Question

The following is from Alsatia Corporation's financial statement information for last month:

Sales                                        $1,400,000

Variable Expenses                      900,000

Fixed Expenses                           300,000     

The company has no beginning or ending inventories and produced and sold 10,000 units during the month.

A) What is the company's break-even in units?

B) How many units would the company have to sell to attain target profits of $225,000?

C) What is the company's degree of operating leverage?

SHOW ALL WORK. ANSWER ALL PARTS

Explanation / Answer

A)

Contribution Margin = Sales – Variable Expenses = $1,400,000 - $900,000 = $500,000

Contribution margin per unit = $500,000 / 10,000 = $50 per unit

Break even in units = Fixed expenses / Contribution margin per unit = $300,000 / $50 = 6,000 units

B)

Target profit = $225,000

Required contribution margin = Fixed Expenses + Target profit = $300,000 + $225.000 = $525,000

Units to be sold = $525,500 / $50 = $10,500

C)

Operating Income of the company = Contribution margin – Fixed expenses = $500,000 - $300,000 = $200,000

Degree of operating leverage = Contribution margin / Operating income = $500,000 / $200,000 = 2.5