Fin 200 Break Even Analysis

The Watson Corporation sells spools of thread to industrial clothing suppliers.
They sell 25 pound spools of thread for \$150 each.
The Watson Corporation’s fixed costs are \$200,000 and the variable costs are \$2 per pound.

a.   What is the break-even point in units (spools of thread)?

BE =             Fixed Costs             =                 Fixed Costs                 =         FC
Contribution Margin   Price - Variable Cost per Unit               P - VC

\$200,000 = \$200,000 = 2000 units
\$150 - \$50 \$100

b.   Calculate the profit or loss on 1,500 and 3,000 spools of thread.

1,500 spools
Revenue = Units * Price per Unit
1,500 * \$150 = \$225,000
Total Cost = Fixed Costs + Variable Costs
\$200,000 + (1,500 * \$50) = \$200,000 + \$75,000 = \$275,000
Revenue - Total Cost = Profit or Loss
\$225,000 - \$275,000 = (\$50,000) Income Loss

3,000 spools
Revenue = Units - Price per Unit
3,000 * \$150 = \$450,000
Total Cost = Fixed Costs + Variable Costs
\$200,000 + (3,000 * \$50) = \$200,000 + \$150,000 = \$350,000
Revenue - Total Cost = Profit or Loss
\$450,000 - \$350,000 = \$100,000 Profit

c.   What is the degree of operating leverage at 2,500 spools?   And 3,000 spools?
Why does the degree of operating leverage change as the quantity sold increases?

DOL =       Q(P - VC)
Q(P - VC) - PC

2,500 spools 3,000 spools
DOL =                 2,500 (\$150 - \$50)           DOL =           3,000 (\$150 - \$50)
2,500 (\$150 - \$50) - \$200,000 3,000 (\$150 - \$50) - \$200,000

=...