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

=...