Question

We are evaluating a project that costs $739,600, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 80,000 units per year. Price per unit is $49, variable cost per unit is $34, and fixed costs are $735,000 per year. The tax rate is 23 percent, and we require a return of 9 percent on this project.

Required:
1. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
2. What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

a) Break-even point (BEP) = 49,000 units

b) Degree of operating leverage at the BEP

The accounting beak-even point the contribution would be exactly equal to the fixed cost. Hence, there wont be operating income. So we may not be define the operating leverage at the break-even point

Step-by-step explanation:

The break-even point is the level of sales that produces no profit or loss

It is the units to be sold to make total contribution equal to total fixed cost.

BEP = Total fixed cost/ contribution per unit

= 735,000 /(49-34)

= 49,000 units

Degree of operation leverage(DOL) is calculated as follows;

DOL = contribution from sales/Net operating income

contribution per unit = (49-34)= 15

Contribution from sale = 15 × 49,000= 735000

Net operation income =Contribution - Fixed cost

= $735,000 - $735,000 = 0

At the accounting beak-even point the contribution would be exactly equal to the fixed cost. Hence, there wont be operating income. So we may not be define the operating leverage at the break-even point