The Andrea S. Fault Seismometer Company is an all-equity-financed firm. It earns monthly, after taxes, $24,000 on sales of $880,000. The tax rate of the company is 40 percent. The company’s only product, “The Desktop Seismometer,” sells for $200, of which $150 is variable cost.
a. What is the company’s monthly fixed operating cost?
b. What is the monthly operating break-even point in units? In dollars?
c. Compute and plot the degree of operating leverage (DOL) versus quantity produced and sold for the following possible monthly sales levels: 4,000 units; 4,400 units; 4,800 units; 5,200 units; 5,600 units; and 6,000 units.
d. What does the graph that you drew (see Part (c)) – and especially the company’s DOL at its current sales figure – tell you about the sensitivity of the company’s operating profit to changes in sales?
2. What would be the effect of the following on the break-even point of the Andrea S. Fault Company (Problem 1)?
a. An increase in selling price of $50 per unit (assume that sales volume remains constant)
b. A decrease in fixed operating costs of $20,000 per month
c. A decrease in variable costs of $10 per unit and an increase in fixed costs of $60,000 per month.