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What is the operating leverage of olinde electronics

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Reference no: EM133105229

Question - Olinde Electronics Inc. produces stereo components that sell at a Price of Php100.00 per unit. Olinde's fixed costs are Php200,000.00, variable costs are Php50.00 per unit, 5,000 components are produced and sold each year, BIT is currently Php50,000.00, and Olinde's assets (all equity-financed) are Php500,000.00. Olinde can change its production process by adding Php400,000.00 to assets and Php50,000.00 to fixed operating costs.

This change would (1) reduce variable costs per unit by Php10.00 and (2) increase output by 2,000 units, but (3) the sales price on all units would have to be lowered to Php95.00 to permit sales of the additional output. Olinde has tax loss carry-forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%.

A. Would Olinde's break-even point increase or decrease if it made the change?

B. How much is the increased?

C. Should Olinde make the change? Why or why not?

D. What is the operating leverage of Olinde Electronics before the change?

E. What is the operating leverage of Olinde Electronics after the change?

Reference no: EM133105229

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