Use the following information to answer questions 1 and 2
Venture Inc. manufactures and sells headphones to airline and other passenger transportation companies. Each headphone sells for $5.50, and this year sales are expected to be 1,750,000 units. Variable manufacturing costs for this level of manufacturing and sales (Venture does not have any inventories) are expected to total $3,238,125. Fixed manufacturing costs will be $4,550,000 for the coming period. It is expected that variable selling and administrative costs will be 2.0% percent of sales while fixed selling and administrative costs will total $1,000,000. Venture currently has $8,000,000 in debt outstanding with an annual cost of 4.5%. The company has 500,000 common shares outstanding, and no preferred shares. Venture's corporate tax rate
Venture is considering a reorganization that would see no increase in sales volume, however variable manufacturing costs would decrease by 20%, fixed manufacturing costs would increase by $250,000; however variable selling costs would increase to 2.5% of sales while fixed would
decrease by $100,000. This reorganization would cost the company $3,000,000 which would be raised through the issue of additional debt at a cost of 3.5% (For purposes of this question, assume that these re-organization costs would be carried on the Balance Sheet).
1. What are the DOL and DFL (respectively) for Venture Inc. before the re-organization?
a. 3.48; 1.24
b. 3.77; 4.57
c. 9.61; 0.44
d. 9.61; 1.79
e. 9.61; 2.27
2. Assuming the re-organization occurs, and the DOL is correctly calculated at 6.21, which of the following is the DTL for Venture Inc.?
The solution explains the calculation of DOL, DFL and DTL.