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# Business Math : Break-Even Point, Fixed and Variable Costs, Degree of Operating, Financial and Combined Leverage and Collections

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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.

7. The Sterling Tire Company income statement for 2001 is as follows:

Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.

8. Beth's Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6 percent per annum.

a. If the firm has \$4 million per day in collections and \$3 million per day in disbursements, how many dollars has the cash management system freed up?

b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?

9. Route Canal Shipping Company has the following schedule for aging of accounts receivable:
a. Fill in column (4) for each month.

b. If the firm had \$1,440,000 in credit sales over the four-month period, compute
the average collection period. Average daily sales should be based on a
120-day period.

c. If the firm likes to see its bills collected in 30 days, should it be satisfied with
the average collection period?

d. Disregarding your answer to part c and considering the aging schedule for
accounts receivable, should the company be satisfied?

e. What additional information does the aging schedule bring to the company
that the average collection period may not show?

10. Randall Corporation plans to borrow \$200,000 for one year at 12 percent from the Waco State Bank. There is a 20 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of \$10,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement.

What is the effective rate of interest?

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