Question

Problem 14-12

BWP projects sales of 100000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and fixed costs will be $2.4 million. BWP has $1 million in bonds outstanding, on which it pays 7%, and its marginal tax rate is 40%. There are 100000 shares of stock outstanding which trade at their book value of $30. Compute BWP's contribution, contribution margin, net income, DOL, and EPS. Round the answers to two decimal places. Enter your net income answer in whole dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2.

Contribution per unit	$
Contribution Margin	%
Net Income	$
DOL
EPS	$

Answer 1

The contribution per unit is computed as shown below:

= Selling price per unit - variable cost per unit

= $ 50 - $ 50 x 40%

= $ 30

Contribution margin is computed as follows:

= Contribution per unit / Sales per unit

= $ 30 / $ 50

= 60%

Net income is computed as follows:

= (Sales - variable cost - fixed cost - interest cost) x (1 - tax rate)

= (100000 x $ 50 - 100000 x $ 50 x 40% - $ 2,400,000 - $ 1,000,000 x 0.07) x (1 - 0.40)

= $ 530,000 x 0.60

= $ 318,000

DOL is computed as follows:

= Contribution / EBIT

= ($ 30 x 100000) / (Sales - variable cost - fixed cost)

= ($ 30 x 100000) / (100000 x $ 50 - 100000 x $ 50 x 40% - $ 2,400,000)

= $ 3,000,000 / $ 600,000

= 5

EPS is computed as follows:

= Net income / Number of shares outstanding

= $ 318,000 / 100000

= $ 3.18

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