12-5. (Operating leverage) The Quarles Distributing Company manufact sortment of

Question

12-5. (Operating leverage) The Quarles Distributing Company manufact sortment of cold air intake systems for high-performance engines. The a ing price for the various units is $600. The associated variable cost 0 Fixed costs for the firm average $200,000 annually. 2 12-9 a sm iona average sell. per 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 be so A de point? c. What is the degree of operating leverage (i.e, the ratio of the percent changein divided by the corresponding percent change in sales) for a production and sales level of 5,000 units for the firm? (Calculate to three decimal places.) $6 m d. What will be the projecte d 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

Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up   Statementshowing Computations Paticulars Amount Sales price per unit                  600.00 Less Variable Expenses per unit               (450.00) Contribution Margin = 600 - 450                  150.00 Fixed cost         200,000.00 a) Break even point in units = 200,000/150              1,333.33 b) CM Ratio = 150/600 25.00% Dollar Sales Volume = 200,000/25%         800,000.00 c) Sales = 600*5000      3,000,000.00 Less Variable Expenses = 5000*450 (2,250,000.00) Contribution Margin         750,000.00 Fixed cost       (200,000.00) Net operating income = 750,000 - 200,000         550,000.00 Degree of operating leverage = 750,000/550,000                      1.36 d) Increase in sale level 20% DOL                      1.36 Project effect on earnings = 20%*1.36 27.20% Increase in Income = 550,000*27.20%         149,600.00

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