Rocky Mount Metals Company manufactures an assortment of wood-burning stoves. Th
ID: 2752191 • Letter: R
Question
Rocky Mount Metals Company manufactures an assortment of wood-burning stoves. The average selling price for the various units is $700. The associated variable cost is $400 per unit. Fixed costs for the firm average $200,000 annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage for a production and sales level of 5,000 units for the firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest and taxes if the firm’s sales level should increase by 20 percent from the volume noted in part c?
Explanation / Answer
a. Contribution per unit = Selling Price - Variable Cost
= 700 - 400
= $300
Fixed Costs = $200000
Breakeven point in units = Fixed cost / Contribution per unit
= 200000 / 300
= 666 units
b.Dollar Sales Volume to achieve the breakeven point = Fixed Cost / Contirbution margin %
= 200000 / 42.86%
= $466667
c. Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / [Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost]
= [5000 x (700-400)] / [5000 x (700-400) - 200000]
= 1.154 times
d. Sales level = 5000 x 1.20 = 6000 units
Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / [Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost]
= [6000 x (700-400)] / [6000 x (700-400) - 200000]
= 112.5%
Operating Leverage = % Change in EBIT / % Change in Sales
112.5 = % Change in EBIT / 20
% Change in EBIT = 22.5
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