Problem Set: Operating Leverage

1. Oren Manis has a division that makes burlap bags for the citrus industry. The division has fixed costs of $20,000 per
month, and it expects to sell 60,000 bags per month. If the variable cost per bag is $2.50, what price must the division
charge in order to break even?

2. Limau Kasturi Berhad will produce 55,000 widgets next year. Variable costs will equal 30 percent of sales, while fixed
costs will total $110,000. At what price must each widget be sold for the company to achieve an EBIT of $95,000?

3. Cerry Technologies has sales of $4,000,000. The company’s fixed operating costs total $700,000 and its variable
costs equal 60 percent of sales, so the company’s current operating income is $900,000. The company’s interest
expense is $300,000. What is the company’s degree of total operating leverage? What is the company’s degree
financial leverage?

4. Calculate the break-even sales assuming RM575,000 fixed costs and variable cost-to-sales ratio of 60%.

5. Calculate the ratio of variable-costs-to-sales for a firm with RM1,500,000 break-even revenues and RM400,000 fixed
costs.

6. A firm with RM850,000 fixed costs is expected to produce RM170,000 in profits. What is its Degree of Operating
Leverage?

7. If a firm’s Degree of Operating Leverage is 4.0 when its profit is RM1,000,000 and its depreciation is RM500,000, how
much (other) fixed costs does it have?

8. Epal Ceria Berhad has a division that makes plastic composite bags for the space industry. The division has fixed
costs of $45,000 per month, and it expects to sell 45,000 bags per month. If the variable cost per bag is $6.00, what
price must the division charge in order to break even?

9. Kiwi Sdn. Bhd. current sales are RM400,000 at a volume of 10,000 units. Fixed costs are RM120,000 and variable
costs are RM30 per unit. What is the company break-even sales volume in units?