Question $2$

CK Ltd manufactures $1GB$ flash drives. The maximum production capacity is $200,000$ units

per month. The information related to the selling price and other cost data are as follows:

Sales price per unit $($current monthly sales volume is $130,000$ units$)$ $$20$

Variable cost per unit

Direct materials $$6\mathrm{.}2$

Direct labour $7\mathrm{.}0$

Variable manufacturing overhead $,2\mathrm{.}0$

Variable selling and administrative expenses $,1\mathrm{.}8$

Monthly fixed expenses

Fixed manufacturing overhead $$102300$

Fixed selling and administrative expenses $,187800$

Required:

$($a$)$ Compute the breakeven point in units and sales dollars.

$($b$)$ Management is currently in contract negotiations with the labour union. If the negotiations fail,

direct labour costs will increase by $10\%$ and fixed costs will increase by $$22,500$ per month. If these

costs increase, how many units will the company have to sell each month to break even?

$($c$)$ Return to original data for this question, determine the operating leverage. If sales volume

increased by $7\%,$ what would be the effect on its operating income?