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Question about Use of financial leverage

Discussion Questions: 1, 2, 3, 5 and 7

1. Discuss the various uses for break-even analysis.

2. What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?

3. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).

5. What does risk taking have to do with the use of operating and financial leverage?

7. How does the interest rate on new debt influence the use of financial leverage?

Problems 1 and 3

1. Shock Electronics sells portable heaters for $25 per unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed costs are $96,000.

a. Compute the break-even point in units.
b. Fill in the table below (in dollars) to illustrate that the break-even point has been achieved.

Sales __ __
-Fixed Costs __ __
-Total variable costs __ __
Net profit (loss) __ __

3. Therapeutic Systems sells its products for $8 per unit. It has the following costs:

Rent $120,000
Factory labor $1.50 per unit
Executive Salaries $112,000
Raw material $.70 per unit

Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $6, compute the break-even point.

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Discussion Questions: 1, 2, 3, 5 and 7

1. Discuss the various uses for break-even analysis.

2. What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?

3. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive ...

Solution Summary

This discusses the use of financial leverage

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