Problem:
Degree of Operating Leverage.
DynaLinear, Ltd., produces digital-to-analog converters for compact disk players used by radio stations and audio enthusiasts. It is contemplating an expansion into the moderately-priced home audio market by producing a CD player that would sell at a price of $300. The production of each CD player would require $100 in materials, and 3.75 hours of labor at the rate of $20 per hour for wages and fringe benefits plus variable overhead tied to labor. Energy, supervisory and other variable overhead costs would amount to $50 per unit. The accounting department has derived an allocated fixed overhead charge of $25 per CD player (at a projected volume of 14,000 units) to account for the expected increase in fixed costs.
1. What is DynaLinear's break even sales volume (in units) for home audio CD players?
2. Calculate the degree of operating leverage at a projected volume of 14,000 units and explain what the DOL means.