Question: (Operating leverage) The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $600. The associated variable cost is $450 per unit. Fixed costs for the firm average $200,000 annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage (i.e., the ratio of the percent change in EBIT divided by the corresponding percent change in sales) for a production and sales level of 5,000 units for the firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest and taxes if the firm's sales level should increase by 20 percent from the volume noted in part (c)?