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Break Even Analysis for a Lighting Company

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Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and has variable costs of $15.50 per unit.

a. Compute the break-even point.
b. Ms. Watts comes up with a new plan to cut fixed costs to $75,000. However, more labor will now be required, which will increase variable costs per unit to $17. The sales price will remain at $28. What is the new break-even point?
c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

The Sosa Company produces baseball gloves. The company's income statement for 2004 is as follows:
SOSA Company
Income Statement
For the Year Ended December 31, 2004
Sales (20,000 gloves at $60 each) . . . . . . . . . . . . . . . . . . . . . . . $1,200,000
Less: Variable costs (20,000 gloves at $20) . . . . . . . . . . . . . . 400,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . . 200,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000

Given this income statement, compute the following:
a. Degree of operating leverage
b. Degree of financial leverage
c. Degree of combined leverage

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Solution Summary

This solution is comprised of a detailed, step by step response which clearly illustrates how to compute each of the leverage-based values. An Excel file is attached which presents the full solution.

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