# Operating & financial leverage,BEP & EPS

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

target?

b. What is Rogers' breakeven level of sales at the level of fixed operating costs

determined in (a)?

https://brainmass.com/business/accounting/operating-financial-leverage-bep-eps-230838

#### 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

check

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