Degree of Operating Leverage

question 45

Essay

Degree of Operating Leverage. Ion Generating, Inc., produces ion generators and control (detection) devices for industrial applications such as chemical labs. It is contemplating an expansion into the home security market by producing a smoke detector based off of the same technology that would sell at a price of $50. The production of each smoke detector would require $20 in materials, and 0.4 hours of labor at the rate of $25 per hour. Energy, supervisory and other variable overhead costs would amount to $10 per unit. The accounting department has derived an allocated fixed overhead charge of $7.50 per smoke detector (at a projected volume of 300,000 units) to account for the expected increase in fixed costs.
A. What is Ion Generating's breakeven sales volume (in units) for smoke detectors?
B. Calculate the degree of operating leverage at a projected volume of 300,000 units and explain what the DOL means.

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Definitions:

Percent

A unit of measure that represents one hundredth of a whole, commonly used to describe proportions.

Result

The outcome or final value obtained after performing a calculation or a series of operations.

Final Value

The ultimate quantity or result that is arrived at after all calculations or changes have been applied.

Result

The consequence or effect obtained after performing a specific action or series of actions.