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# 1. The Hartnett Corporation manufactures baseballs bats with

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1. The Hartnett Corporation manufactures baseballs bats with Pudge Rodriquez's autograph stamped on them. Each bat sells for \$13 and has a variable cost of \$8. There are \$20,000 fixed cost involved in the production process.

a. Compute the break even point in Units.
b. Find the sales (in Units) needed to earn a profit of \$15,000

2. Eaton Tool company has fixed cost of \$200,000, sells its units for \$56, and has variable cost of per unit.

a. Compute the break even point.

b. Ms Eaton comes up with a new plan to cut fixed cost to \$150,000. However, more labor will now be required, which will increase variable cost per unit to \$34. The sales price will remain at \$56. 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)?

3. The Harding Company manufactures skates. The company's income state for 2010 is as follows.

Sales (10,000) skates @ \$50 each \$500,000
Less variable cost (10,000 skates at \$20)..200,000
Fixed cost...........150,000
Earnings before interest and taxes (EBIT) 150,000
Interest expense .... 60,000
Earning before taxes (EBT) 90,000
Income Tax Expense 40% 36,000
Earnings after taxes (EAT) \$54,000

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 (number of skates).

4. Austin Electronics expects sales next year to be \$900,000if the economy is strong. \$650,000 if the economy is steady, and \$375,000 if the economy is weak. The firm believes there is a 15% profitability the economy will be strong. A 60% probability of a steady economy and a 25% probability of a weak economy. What is the expected level of sales for next year?

5. Axle Supply Co. Expects sales next year to be \$300,000. Inventory and receivable will increase by \$60,000 to accommodate this sales levels. The company has a steady profit margin of 10% with a 30% dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other that which will occur with the external financing.

6. Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of \$200,000. The company can borrow \$200,000 for three years at 12% annual interest or for one year at 10% annual interest.
a. How much would the firm save in interest over the three year life of the computer system if the one year loan is utilized, and the loan is rolled over (re-borrowed) each year at the same 10% rate? Compare this to the 12% three year loan.

b. What if interest rates on the 10% loan go up to 15% in the second year and 18% in the third year? What would be the total interest cost compared to the 12%, three year loan?

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

8. Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of \$8 per order, and carrying cost of \$1.20 per unit.

a. What is the economic ordering quantity?
b. How many orders will be placed during the year?
c. What will the average inventory be?
d. What is the total cost of ordering and carrying inventory?

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1. The Hartnett Corporation manufactures baseballs bats with Pudge Rodriquez's autograph stamped on them. Each bat sells for \$13 and has a variable cost of \$8. There are \$20,000 of fixed costs involved in the production process.

a. Compute the breakeven point in Units.
b. Find the sales (in Units) needed to earn a profit of \$15,000

a. BE = 20,000/(13-8)= 4,000 units
b. Q= (Profit+ FC)/(P-VC)= (\$15,000+ \$20,000)/(\$13- \$8) =7,000 units

2. Eaton Tool company has fixed cost of \$200,000, sells its units for \$56, and has variable cost of per unit.

a. compute the breakeven point.

b. Ms Eaton comes up with a new plan to cut fixed cost to \$150,000. However, more labor will now be required, which will increase variable cost per unit to \$34. The sales price will remain at \$56. What is the new breakeven point?

c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

a. BE= Fixed costs/(price -variable cost per unit)
=\$200,000 / \$56- \$31
= 8,000 units

b. BE= Fixed costs/(price -variable cost per unit)
=\$200,000 / \$56- \$34
6,818 units
The breakeven level decreases
c. Profitability is likely to be less than when it's at very high volume levels.

3. The Harding Company manufactures skates. The company's income state for 2010 is as follows.

Sales (10,000) skates @ \$50 each \$500,000
Less variable cost (10,000 skates at \$20) \$200,000
Fixed cost 150,000
Earnings before interest and taxes (EBIT) 150,000
Interest expense 60,000
Earning before taxes (EBT) 90,000
Income Tax Expense 40% 36,000 ...

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