Question

Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $14,000 and at that price, Thad estimates 600 units would be sold each year. The variable cost to produce and sell the cycles would be $9,800 per unit. The annual fixed cost would be $1,890,000.
a. What is the break-even in unit sales?
Break-even in unit sales
b.
What is the margin of safety in dollars (Omit the "$" sign in your response.)


Margin of safety in dollars $
c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)
Degree of operating leverage

Answer 1

Answer:

a. Break-even in units = 450 units

b. Margin of Safety in Dollars = 2,100,000

c. Degree of Operating Leverage = 4

Explanation:

a. Break-even in units = 1,890,000 / (14,000 - 9,800) = 450 units

b. Margin of Safety in Dollars = (600 - 450) * 14,000 = 2,100,000

   This calculates the amount by which Sales exceed the break-even level of sales.

• Sales = 14000 * 600 = 8,400,000
• Variable Costs = 9800 * 600 = 5,880,000
• Fixed Costs = 1,890,000

c. Degree of Operating Leverage = (Sales - Variable cost) / (Sales - Variable Cost - Fixed Costs )

   Degree of Operating Leverage = (8400000 - 5880000) / (8400000 - 5880000 - 1890000) = 4