You are a hard-working analyst in the office of financial ...
You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for this company. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.
Return on operating assets = 25%
Operating asset turnover = 5 times
Operating assets = $20 million
Degree of operating leverage = 4 times
Return on Operating Assets = [pic]
Net Operating Income = $20,000,000 × 25%
= $5,000,000
DOL = [pic]
Contribution Margin = $5,000,000 × 4
= $20,000,000
Since Net Operating Income = Contribution Margin – Fixed Costs
Fixed Costs = $20,000,000 - $5,000,000
= $15,000,000
Unit Contribution Margin = $20,000,000 / 10,000,000
= $2
Breakeven Point in Units = [pic][pic]
Breakeven Point in Units = $15,000,000 / $2
= 7,500,000 units
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