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# Break-even point for operating expenses

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Dale has just informed you that he is considering an expansion of his present facilities to accomodate additional bussiness. His current income statement is as follows:

Sales- 5,000,000
Less: Variable expenses (50% of Sales) 2,500,000
Fixed expenses 1,800,000
________
Earnings before interest and taxes (EBIT) 700,000
Interest (10% costs) 200,000
________
Earnings before taxes (EBT) 500,000
Taxes (30%) 150,000
Earnings after taxes (EAT) 350,000

Shares of commom stock currently outstanding-200,000
Earnings per share: 1.75\$

Dales donust is currently financed at 50% debt 50% equity (common stock, par value 10\$ ) In order to expand the facilities, i have estimated that Dale will need to raise 2,000,000 in additional capital funds. The investment banker has laid out a plan for me and Dale to consider: sell 2,000,000 of additional common stock at 20\$ per share (100,000 shares).

Variable costs are expected to stay at 50% of sales, while fixed costs will increase by \$500,000 (raising up to \$2,300,000) Dales is not sure how much this expansion will add to sales, but he estimates that sales should increase by 1,000,000 per year for the next 5 years! For example, next years sales will be 6,000,000 then 7,000,000for the year after that and up to 10,000,000 in the fifth year.

Dale is excited about the new prospects and wants me to complete a detailed analysis of the expansion by doing the following:

1. Compute the break-even point for operating expenses before and after the expansion.
2. Compute the earning per share at 6,000,000 a year for the first year through 10,000,000 a year for the 5th year.

https://brainmass.com/economics/break-even-analysis/break-even-point-for-operating-expenses-366847

#### Solution Summary

Break-even point for operating expenses is summarized in this solution.

\$2.19

## Compute break-even point, contribution margin per unit, operating income

Brazen, Inc. produces sound amplifiers for electric guitars. The firm's income statement showed the following:

Revenues (8,400 units) \$504,000 100%
Variable expenses (302,400) 60%
Contribution margin \$201,600 40%
Fixed expenses (140,400)
Operating income \$ 61,200

An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to \$315,000 per year. The firm's production capacity will increase, which is expected to result in a 25 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.

(a.) Calculate the firm's current contribution margin per unit and break-even point in units.
(b.) Calculate the firm's contribution margin per unit and break-even point in terms of units if the new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.

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