What is operating leverage

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Sapphire Limited manufactures and sells GPS device. Price and cost data for the company are provided below: Selling price per unit $250 Variable costs per unit Manufacturing costs Direct material 82 Direct labour 40 Variable manufacturing overhead 60 Variable selling and administrative costs 16 Annual fixed costs Fixed manufacturing overhead $2 880 000 Fixed selling and administrative costs $4 140 000 Forecasted annual sales $35 000 000 Required: (a) What is Sapphire Limited’s break-even point in units? (b) How many would Sapphire Limited have to sell in order to earn a before tax profit of $5 200 000? (c) If the company’s direct labour costs increase by 10 percent, how many units will the company have to sell next year to reach its break-even point? (d) What is operating leverage? How can an understanding of this concept be useful to managers?

Reference no: EM132227628

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