Rocky Mount Metals Company manufactures an assortment of wood-burning stoves. Th

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 6,000 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 35 percent from the volume noted in part c?

Explanation / Answer

a)

Breakeven point = Fixed cost /selling price - variable cost = 200,000/(700-400)

200000/300 = 666.67 units

b)

Sales in dollars = Fixed cost / (1-(Variable Cost/Sales) = 200,000/ 1 -0.57 = $ 466,667

c)

Degree of Operating Leverage ,

= 6000 * (700-400) / ( 6000 * (700-400)- 200000) = 1,800,000/1,600,000 = 1.125 times

d)

Effect of projected earnings before interest and taxes

= 35% * 1.125 = 39.375 % increase

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