Question

Both Apple and Google sell electronic devices, and each of these companies has a different product mix.

Required

1. Assume the following data are available for both companies. Compute each company’s break-even point in unit sales. (Each company sells many devices at many different selling prices, and each has its variable costs. This assignment assumes an average selling price per unit and an average cost per item.)

	Apple	Google
Average selling price per unit sold	\(550 per unit	\)470 per unit
Average variable cost per unit sold	\(250 per unit	\)270 per unit
Total fixed cost (\( in million)	\)36,000	$10,000

2. If unit sales were to decline, which company would experience the larger decline in operating profit? Explain.

Short answer

1. Break-even point in units:

Apple:120 units

Google:50 units

1. Apple will face a higher decline in operating profit due to a decline in sales.

Step-by-step solution

Definition of Operating Leverage

The formula used to calculate the degree to which the firm's operating profit will increase/decrease due to an increase/decrease in the sales of the business entity is known as operating leverage.

Break-even point

Calculation of contribution margin of each company:

Company	Sales price per unit	-	Variable cost per unit	=	Contribution margin per unit
Apple	$550	-	$250	=	$300
Google	$470	-	$270	=	$200

Calculation of break-even point in units:

Company	Fixed cost	/	Contribution margin per unit	=	Break-even units
Apple	$36,000	/	$300	=	120 units
Google	$10,000	/	$200	=	50 units

Effect of decline in unit sales

Suppose both businesses have unit sales of 1,000 units:

Particular	Apple	Google
Sales	$550,000	$470,000
Less: Variable cost	(250,000)	(270,000)
Contribution margin	300,000	200,000
Less: Fixed cost	(36,000)	(10,000)
Pre-tax income	$264,000	$190,000

Calculation of operating leverage:

Company	Contribution margin	/	Pre-tax income	=	Operating leverage
Apple	$300,000	/	$264,000	=	1.13
Google	$200,000	/	$190,000	=	1.05

The operating leverage of Apple is higher than Google. Therefore, it will face a higher decline in profit due to a decline in sales.