Question

The O'Reilly Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $870,000 per year Variable costs are $0.30 per unit.

Read the equirements
Requirement 1. What is the current annual operating income? (a) Start by determining the formula to calculate operating income. ) 1. a. What is the current annual operating income? b. What is the current breakeven point in revenues?

Answer 1

The O'Reilly Company's current annual operating income is $130,000, calculated by subtracting total variable costs and fixed costs from total revenue. The current breakeven point in revenues is $2,175,000, found by calculating the breakeven units and multiplying by the price per unit.

Step-by-step explanation:

The question involves calculating the current annual operating income and the breakeven point in revenues for the O'Reilly Company, which manufactures and sells pens. To calculate the operating income, the formula to use is:

Total Revenue - Total Variable Costs - Fixed Costs = Operating Income

For the current annual operating income:

• Total Revenue = 5,000,000 units x $0.50 per unit = $2,500,000
• Total Variable Costs = 5,000,000 units x $0.30 per unit = $1,500,000
• Fixed Costs = $870,000
• Operating Income = $2,500,000 - $1,500,000 - $870,000 = $130,000

For the current breakeven point in revenues, the formula to use is:

Fixed Costs / (Price per Unit - Variable Cost per Unit) = Breakeven Units

Then multiply breakeven units by price per unit to find breakeven revenues.

Breakeven Units = $870,000 / ($0.50 - $0.30) = 4,350,000 units

Breakeven Revenues = 4,350,000 units x $0.50 = $2,175,000