Discussion:
Colonial Furniture, Ltd. is contemplating production of an office desk that would sell for $800. The production of each desk would require $310 in materials and 35 hours of labor at a cost of $8 per hour. Energy, supervisory, and other variable overhead costs would amount to $60 per unit. The accounting department has derived an allocated fixed overhead charge of $75 per desk (at a projected volume of 2000 units) to account for the expected increase in fixed costs.
A. What is Colonial Furniture's breakeven sales volume (in units) for office desks? Show all your work and explain your answer.
B. Calculate the degree of operating leverage (DOL) at a projected volume of 2000 units and explain what the DOL means.