- CFA Exams
- CFA Exam: Level I 2021
- Study Session 11. Corporate Finance (2)
- Reading 34. Measures of Leverage
- Subject 1. Business Risk and Operating Leverage

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**CFA Practice Question**

A firm plans to manufacture widgets and sell them at a price of $6 each. Fixed costs associated with the project will be $9,500 and variable costs for each widget will be $5.25. The operating profit for a sales level of 22,000 would be closest to ______.

B. $12,667

C. $106,000

A. $7,000

B. $12,667

C. $106,000

Correct Answer: A

Each unit contributes $0.75 to operating profit. Sales of 22,000 units will contribute $16,500 to operating profit. Taking away the fixed costs of $9,500 leaves a net operating profit of $7,000.

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**User Contributed Comments**
13

User |
Comment |
---|---|

surob |
Is operating income equal to operating profit? |

nike |
operating income is operating profit. |

Khadria |
Removing fixed cost 9500 from sales 22000 gives 12500. But we have variable costs also. So any answer less than 12500 can be correct. Luckily only A is less than 12500. |

jhmorris |
Save yourself time and just plug it into the BRKEVN function on the BAII Plus Professional. At the very least it could eliminate careless mistakes. Steps: 1. Press 2nd and the number 6 2. Q = 22,000 (number or quantity of units) 3. FC = 9,500 (fixed costs) 4. VC = 5.25 (variable cost per unit) 5. P = 6.00 (price per unit) 6. Scroll to PFT and press CPT |

VenkatB |
Thank you jhmorris. |

SergoUA |
1. $6-$5.25=$ 0.75 2. 22,000*$0.75=$16,500 3. $16,500-$9,500=$7,000 |

michlam14 |
operating income is operating profit = EBIT given by revenue - operating expenses |

moneyguy |
Thanks a bunch, jhmorris! These BAII tricks are nice... |

johntan1979 |
You don't need to waste time keying in BRKEVEN for this question. Just calculate 6-5.25, times 22,000, minus 9,500. That's it. 10 seconds. |

jonan203 |
yea, i pretty much keyed in the numbers manually in my 12c, took like 7 seconds, it is better to understand the underlying formulas rather than rely on the calculator to do the work for you, IMO. |

GouldenOne |
if EBIT removes fixed and sales removes fixed... how can you ever have a difference in DOL? |

gill15 |
People love using these calculators way toooo much... |

leon121 |
agree w/jonan203 and johntan |