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
Well, it looks like you're in quite the number crunching situation! Let's break it down and find that break-even point in units of output for the firm.
First, let's find out the operating income. We can calculate that by multiplying the return on operating assets by the operating assets. So, 25% of $20 million gives us an operating income of $5 million.
Next, we need to determine the contribution margin, which is the operating income divided by the operating asset turnover. So, $5 million divided by 5 gives us a contribution margin of $1 million.
Now, let's calculate the fixed costs. Taking the operating income and dividing it by the degree of operating leverage, we get $5 million divided by 4, giving us $1.25 million in fixed costs.
Finally, we can find the break-even point. It's simply the fixed costs divided by the contribution margin. So, $1.25 million divided by $1 million gives us a break-even point of 1.25 million units.
So, there you have it! The break-even point in units of output for the firm is 1.25 million units. Just remember, if things get tough, you can always join the circus. Good luck with the numbers!
To find the break-even point in units of output for the firm, we need to use the following formula:
Break-even point (in units) = Fixed costs / (Revenue per unit - Variable costs per unit)
Let's break down the given information to calculate the break-even point.
1. Return on operating assets: This is the ratio of the net operating profit to the operating assets. It tells us how efficiently the assets are being utilized. In this case, the return on operating assets is 25%. However, we don't require this information to calculate the break-even point.
2. Operating asset turnover: This is the ratio of revenue to operating assets. It tells us how effectively the assets are generating revenue. In this case, the operating asset turnover is 5 times.
3. Operating assets: This represents the total value of the company's assets used in operations, which is $20 million.
4. Degree of operating leverage: This measures the sensitivity of operating income to changes in sales volume. In this case, the degree of operating leverage is 4 times.
To determine the break-even point, we need to know the revenue per unit and the variable costs per unit. Unfortunately, this information is not provided. Please check if you have any other information available regarding the revenue and variable costs per unit. Without this data, we cannot calculate the break-even point.