A project has the following estimated data: price = $76 per unit; variable costs

Question

A project has the following estimated data: price = $76 per unit; variable costs = $28.12 per unit; fixed costs = $7,900; required return = 11 percent; initial investment = $12,000; life = five years. Ignore the effect of taxes.

What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)

A project has the following estimated data: price = $76 per unit; variable costs = $28.12 per unit; fixed costs = $7,900; required return = 11 percent; initial investment = $12,000; life = five years. Ignore the effect of taxes.

Explanation / Answer

Initial Investment = $ 12000 Required Return = 11% Required return in $ = 12000 X 11% = $ 1320. $/unit sales                                                                                     76.00 Less:- variable cost                                                                                     28.12 Contribution                                                                                     47.88 Fixed Cost $ 7900 a) Accounting Break even points = Fixed cost/Contribution per unit = 7900/47.88 = 165 units b) cash Break even point = 165 X 76 = $ 12540 c) Financial Break even quantity Amount required to be recovered from Sales = Fixed cost + Required return = 7900 + 1320 = $ 9220 Financial break even quantity = $ 9220/47.88 = 193 units d) Degree of operating level at Financial break even quantity Degree of operating leverage = sales variable costs sales variable costs fixed costs or contribution margin operating income i.e = (193 X 47.88)/1320 = 7 times

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.