PROBLEM 1
Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%.
(1 mark)
(1 mark)
Given,
Contribution margin = 40%
That Contribution margin = $4,250,000 * 40% = $ 1,700,000
Operating Profit margin = 25% = 4,250,000*25% = 1,062,500
Fixed cost for the operation be = 1,700,000 - 1,062,500 = $ 637,500
Break even point in dollars for the firm = Fixedcosts/contribution margin ratio = 637500/40% = $ 1,593,750
Degree of operating Leverage = Contribution/operating profit = 1700000/1062500 = 1.6
Degree of combined leverage = Contribution/Earnings Before tax = 1700000/1475694 = 1.152
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