break even point and effects operating leverage profitablity
Inman Manufacturing Company makes a product that it sells for $60 per unit. The company incurs
variable manufacturing costs of $24 per unit. Variable Selling expenses are $12 per unit, annual fixed
manufacturing costs are $189,000, and fixed selling and administrative costs are $141,000 per year.
Determine the break-even point in units and dollars using the following approaches.
a. Equation method
b. Contribution margin per unit
c. Contribution margin ratio
d. Confirm your results by preparing a contribution margin income statement for the break-even
sales volume.
Then the next problem I have is this.
Webster Training Services (WTS) provides instruction on the use of computer software for the
employees of its corporate clients. It offers courses in the clients offices on the clients equipment. The
only major expense WTS incurs is instructor salaries; it pays instructors $5,000 per course taught. WTS
recently agreed to offer a course of instruction to the employees of Chambers Incorporated at a price of
$400 per student. Chambers estimated that 20 students would attend the course.
Base your answer on the preceding information:
a. Relative to the number of students in a single course, is the cost of instruction a fixed or variable
cost? Pretty sure this is variable?
b. Determine the profit, assuming 20 students attend the course.
c. Determine the profit, assuming a 10 percent increase in enrollment (i.e., enrollment increases to
22 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment decreases
to 18 students). What is the percentage change in profitability?
e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in
profitability. Use the term that identifies this phenomenon.
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