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    Operating & financial leverage,BEP & EPS

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    10. McFrugal, Inc. has expected sales of $20 million. Fixed operating costs are $2.5
    million, and the variable cost ratio is 65 percent. McFrugal has outstanding a
    $12 million, 8 percent bank loan. The firm also has outstanding 1 million
    shares of common stock ($1 par value). McFrugal's tax rate is 40 percent.

    a. What is McFrugal's degree of operating leverage at a sales level of $20 million?
    b. What is McFrugal's current degree of financial leverage?
    c. Forecast McFrugal's EPS if sales drop to $15 million.

    12. East Publishing Company is doing an analysis of a proposed new finance textbook.
    Using the following data, answer (a) through (d).
    Fixed Costs per Edition:
    Development (reviews, class testing, and so on) $18,000
    Copyediting 5,000
    Selling and promotion 7,000
    Typesetting 40,000
    Total $70,000
    Variable Costs per Copy:
    Printing and binding $4.20
    Administrative costs 1.60
    Salespeople's commission (2% of selling price) 0.60
    Author's royalties (12% of selling price) 3.60
    Bookstore discounts (20% of selling price) 6.00
    Total $16.00
    Projected Selling Price $30.00
    The company's marginal tax rate is 40 percent.

    a. Determine the company's breakeven volume for this book:
    i. In units.
    ii. In dollar sales.
    b. Develop a breakeven chart for the textbook.
    c. Determine the number of copies East must sell in order to earn an
    (operating) profit of $21,000 on this book.
    d. Suppose East feels that $30.00 is too high a price to charge for the new
    finance textbook. It has examined the competitive market and determined
    that $24.00 would be a better selling price. What would the breakeven
    volume be at this new selling price?

    15. Rodney Rogers, a recent business school graduate, plans to open a wholesale
    dairy products firm. The business will be completely financed with equity.
    Rogers expects first year sales to total $5,500,000. He desires to earn a target
    pretax profit of $1,000,000 during his first year of operation. Variable costs are
    40 percent of sales.

    a. How large can Rogers' fixed operating costs be if he is to meet his profit
    b. What is Rogers' breakeven level of sales at the level of fixed operating costs
    determined in (a)?

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    Solution Preview

    See attached Excel file.

    Answer to question no: 15'

    sales 5500000
    less; variable cost 2200000
    contribution 3300000
    fixed cost (buff) 2300000
    profit 1000000

    How large can Rogers' fixed operating costs be if he is to meet his profit
    Target? 2300000

    What is Rogers' breakeven level of sales at the level of fixed operating costs
    Determined in (a)?
    Break even sales Fixed cost/PV ratio 3833333
    PV ratio contribution/sales)*100 60

    sales 3833333
    less variable cost 1533333
    contribution 2300000
    fixed cost (buff) 2300000

    Solution Summary

    The solution contains answers for three problems: 1. computation of BEP, BEP chart, volume at desired profit, new BEP under new selling price 2. degree of operating leverage,degree of financial leverage,EPS 3. computation of maximum fixed cost at the target profit and BEP sales