Question

SUNY Package Service (SUNYPS) offers overnight package delivery to Canadian business customers. SUNYPS has recently decided to expand its facilities to better satisfy current and projected demand. Current volume totals two million packages per week at a price of $15 each, and average variable costs are constant at all output levels. Fixed costs are $3 million per week, and profit contribution averages one-third of revenues on each delivery. After completion of the expansion project, fixed costs will double, but variable costs will decline by 20%. Remember to write out numbers completely.

a). Calculate the change in SUNYPS’s weekly breakeven output level that is due to expansion.

b). Assuming that volume remains at two million packages per week, calculate the change in the degree of operating leverage that is due to expansion.

Answer 1

Answer:

A) Revenuescurrent volume price 2 million 15 S30 million per week Fixed cost S3 million per week Profit-revenue * 1/3 S30 million 3- S10 million per week variable costs revenues - fixed cost - profit 30-3-10 S17 million per week fixed cost per unit-3 million / 2 million S1.5 per package Variable cost per unit $17 million /2 million S8.5 per unit contribution per unit - selling price per unit - variable cost per unit -15 -8.5 S6.5 per unit current Break even output fixed costs/contribution per unit 3 million 6.5 461,538.46 units or 461,538 units after completion of the project Fixed costs $3 million *2 -S6 million Variable cost per unit 8.5 0.80 S6.80 Contribution per unit - selling price per unit - variable cost per unit

-15-6.8-$8.20 per unit total variable costs 2 million units * 6.8 $13.6 million new Break even output fixed costs/contribution per unit 6 million 8.20 731,707.32 units or 731,707.0 units absolute Change in break even output- new break even - old breakeven -731,707.32-461,538.46 270,168.86 units % change in the break even output-(731,707.32-461,538.46) / 461,538.46-58.5% B) Previous degree ofoperating leverage sales-variable cost) / (sales-variable cost-fixed cost) = (30-17) / (30-17-3) = 13/ 10 = 1.30 new Degree of operating leverage (30 13.6) (30 -13.6-6) 16.4/10.4 1.58 Absolute change in leverage 1.58-1.30 0.28 % Change in leverage-(1.58-1.30) / 1.30-21.30%