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Break-even, fixed v variable costs, degree of leverage, EPS

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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.

8. The Harding Company manufactures skates. The company's income statement
for 2001 is as follows:

HARDING COMPANY
Income Statement
For the Year Ended December 31, 2001
Sales (10,000 skates @ \$50 each) . . . . . . . . . . . \$500,000
Less: Variable costs (10,000 skates at \$20) . . . 200,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Earnings before interest and taxes (EBIT) . . . . . . 150,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Earnings 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).

10. Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for
auto supplies. The separate capital structures for Cain and Able are presented
below.

Cain Able
Debt @ 10% . . . . . . . . . . . . . \$ 50,000 Debt @ 10% . . . . . . . . . . . . . . . . . . \$100,000
Common stock, \$10 par . . . . . 100,000 Common stock, \$10 par . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . \$150,000 Total . . . . . . . . . . . . . . . . . . . . . . . \$150,000
Common shares . . . . . . . . . . 10,000 Common shares . . . . . . . . . . . . . . . 5,000

a. Compute earnings per share if earnings before interest and taxes are
\$10,000, \$15,000, and \$50,000 (assume a 30 percent tax rate).

b. Explain the relationship between earnings per share and the level of EBIT.

c. If the cost of debt went up to 12 percent and all other factors remained
equal, what would be the break-even level for EBIT?

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Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \$9 million in the current year.

I need a solution to the attach problems.

Question # P1
Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \$9 million in the current year. The company is considering the issuance of 1 million additional shares that will net \$40 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?
b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year's results. Should the new issue be undertaken based on earnings per share?
Question # P3
Rockwell Paper Company had earnings after taxes of \$580,000 in the year 2003 with 400,000 shares outstanding. On January 1, 2004, the firm issued 35,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 25 percent.

a. Compute earnings per share for the year 2003.
b. Compute earnings per share for the year 2004.
Question # C3
Sampson Orange Juice Company normally takes 20 days to pay for its average daily credit purchases of \$6,000. Its average daily sales are \$7,000, and it collects accounts in 28 days.

a. What is its net credit position? That is, compute its accounts receivable and accounts payable and subtract the latter from the former.

Accounts receivable = Average daily credit sales x Average collection period
Accounts payable = Average daily credit purchases x Average payment period

b. If the firm extends its average payment period from 20 days to 35 days (and all else remains the same), what is the firm's new net credit position? Has it improved its cash flow?

Question # C1
University Catering sells 50-pound bags of popcorn to university dormitories for \$10 a bag. The fixed costs of this operation are \$80,000, while the variable costs of the popcorn are \$.10 per pound.

a. What is the break-even point in bags?
b. Calculate the profit or loss on 12,000 bags and 25,000 bags.
c. What is the degree of operating leverage at 20,000 bags and 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases?
d. If University Catering has an annual interest payment of \$10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags.
e. What is the degree of combined leverage at both sales levels

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