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Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $12,000 and at that price, Thad estimates 400 units would be sold each year. The variable cost to produce and sell the cycles would be $9,000 per unit. The annual fixed cost would be $960,000.
Show your calculation steps.
a. What is the break-even in unit sales?
Break-even in unit sales _____
b. What is the margin of safety in dollars?
Margin of safety in dollars _____
c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)
Degree of operating leverage _____

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Answer:

a. Break even in unit sales = $960,000 / $12,000 - $9,000 = $960,000 / $3,000 = 320

b. Margin of safety = ($12,000*400) - ($12,000*320) = $4800000 - $3840000 = $960,000

c. Degree of operating leverage = Contribution / PBIT

Contribution =  ($12,000*400) - ($9,000*320) = 4800000 - 2880000 = 1920000

PBIT = 1920000/960,000 = 2

Degree of operating leverage = 1920000/2

Degree of operating leverage = 960,000

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