57
Example 2: A manufacturer of automotive accessories produces rear
view mirrors. A new line of mirrors will require fixed costs of $35,00 to
produce. Each mirror has a variable cost of $8.25. The price of mirrors is
tentatively set at $12.50 each. What volume is needed to break even?
What would be the gross profit if the price is raised to $14.00 and the
sales volume is 10,000 units?
Operating Leverage
The degree of operating leverage (OL) at a point is defined as the ratio of
the percentage change in net operating income to the percentage change
in units sold. The greatest degree of operating leverage is found near the
break even point where a small change in sales may produce a very large
increase in profits. Likewise, firms with a small degree of operating
leverage are operating farther form the break even point, and they are
relatively insensitive to changes in sales volume.
The necessary inputs to calculate the degree of operating leverage and
fixed costs (F), sales price per unit (P), variable cost per unit (V) and
number of units (U).
The operating leverage may be readily calculated as follows:
1. Key in the sales price per unit and press .
2. Key in the variable cost per unit and press .
Keystrokes Display
35000 1
35,000.00 Fixed cost.
8.25 2
8.25 Variable cost.
12.5 3
12.50 Sales price.
0 5
0.00
10
8,235.29
Break-even volume is between 8,235
and 8,236 units.
Keystrokes Display
14 3
14.00 Sales price.
F and V are already stored.
10000 4
10,000.00 Volume.
05
22,500.00
Gross Profit.
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