Question

3. A firm’s product price is $50, and the firm sold 12,500 units. The variable cost...

3. A firm’s product price is $50, and the firm sold 12,500 units. The variable cost is $29.60 per unit, and fixed operating costs are $200,000. Earnings before Interest and Taxes are $55,000. Earnings per Share are $1.38. Fixed interest expense is $10,000 per year, and the tax rate is 21%.

a. Compute the Degree of Operating Leverage. (5 points)

b. Compute the Degree of Financial Leverage. (5 points)

c. Compute the Degree of Total Leverage. (5 points)

d. A 6% increase in sales revenues is forecasted. Estimate the percentage change and dollar value of Earnings before interest and taxes. (5 points)

e. A 6% increase in sales revenues is forecasted. Estimate the percentage change and dollar value of Earnings per Share for next year. (5 points)

Homework Answers

Answer #1

Selling price= $50

Units sold= 12500

Variable cost= $29.6

Fixed cost= $200000

EPS= $1.38

a: Sales= 50*12500 = 625000

Less: Variable costs = 29.6*12500 = 370000

Contribution = $255000

Less: Fixed cost= 200000

EBIT = $55000

Operating leverage= contribution / EBIT

= 255000/ 55000

=4.64 times

b: Financial leverage = EBIT/ (EBIT- Interest-Preferred Div/(1-T))

= 55000/ (55000-10000)

=1.22

c: Total leverage= Operating leverage x financial leverage

= 4.64*1.22

= 5.67

d : EBIT change= $15300 = 27.82%

e: EPS change= $0.47 = 34%

WORKINGS

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
DeSoto Tools Inc. is planning to expand production. The expansion will cost $3,700,000, which can be...
DeSoto Tools Inc. is planning to expand production. The expansion will cost $3,700,000, which can be financed either by bonds at an interest rate of 6 percent or by selling 74,000 shares of common stock at $50 per share. After the expansion, sales are expected to increase by $1,670,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to $1,384,000. The tax rate is 35 percent. The current income statement before expansion is as follows:...
Firm R has sales of 105,000 units at $2.02 per​ unit, variable operating costs of $1.71...
Firm R has sales of 105,000 units at $2.02 per​ unit, variable operating costs of $1.71 per​ unit, and fixed operating costs of $6,020. Interest is $10,130 per year. Firm W has sales of 105,000 units at $2.57 per​ unit, variable operating costs of $1.01 per​ unit, and fixed operating costs of $62,800. Interest is $17,100 per year. Assume that both firms are in the 40% tax bracket. a. Compute the degree of​ operating, financial, and total leverage for firm...
XYZ company's sales $800000, unit variable cost $8, fixed expense $100000, and number of units sold...
XYZ company's sales $800000, unit variable cost $8, fixed expense $100000, and number of units sold equals 80000. Requirements (1-10): Net operating income. 2. Contribution margin percentage. 3. Unit fixed cost. 4. Break-even point in unit sold. 5. Break-even point in total sales dollar. 6. Unit sales to attain the target profit 76000. 7. Margin of safety (Units). 8. Margin of safety (%). 9. Degree of operating leverage. 10.In original information, if the number of quantity sold increase by 10%,...
Suppose Kathy sells 2,000 posters. Use the following financial data ​($40 sales​ price, $31 variable​ cost,...
Suppose Kathy sells 2,000 posters. Use the following financial data ​($40 sales​ price, $31 variable​ cost, $5,220 fixed​ expenses) to compute her operating leverage factor. If sales volume increases 20​%, by what percent will Kathy​'s operating income​ change? Prove your answer. ​First, identify the​ formula, then compute the operating leverage factor. ​(Round your answer to two decimal​ places.) Contribution margin / Operating income = Operating leverage factor / = If sales volume increases 20​%, by what percent will Kathy​'s operating...
The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement...
The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (20,000 tires at $60 each) $1,200,000 Less: Variable costs (20,000 tires at $30) 600,000 Fixed costs 400,000 Earnings before interest and taxes (EBIT) $ 200,000 Interest expense 50,000 Earnings before taxes (EBT) $ 150,000 Income tax expense (30%) 45,000 Earnings after taxes (EAT) $ 105,000 Given this income statement, compute the following: Degree of operating leverage....
Bottom Glove Berhad produces football gloves. The company’s income statement for 2010 is as follows: Bottom...
Bottom Glove Berhad produces football gloves. The company’s income statement for 2010 is as follows: Bottom Glove Berhad Income Statement For the Year Ended December 31, 2013 Sales (20,000 gloves at RM60 each) RM1,200,000   Less: Variable costs (20,000 gloves at RM20) 400,000     Fixed costs 600,000 Earnings before interest and taxes (EBIT) 200,000 Interest expense 80,000 Earnings before taxes (EBT) 120,000 Income tax expense (30%) 36,000 Earnings after taxes (EAT) RM    84,000 Given this income statement, compute the following: a. Degree...
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows: Sales $ 2,240,000 Variable expenses 1,120,000 Contribution margin 1,120,000 Fixed expenses 160,000 Net operating income $ 960,000 Required: Answer each question independently based on the original data: Only question 5 and 6 are needed 1. What is the product's CM ratio? 2. Use the...
(Evaluating profitability​) Last​ year, Stevens Inc. had sales of $396,000​, with a cost of goods sold...
(Evaluating profitability​) Last​ year, Stevens Inc. had sales of $396,000​, with a cost of goods sold of 115,000. The​ firm's operating expenses were $126,000​, and its increase in retained earnings was $50,000. There are currently 21,000 common stock shares outstanding and the firm pays a$1.56 dividend per share. a. Assuming the​ firm's earnings are taxed at 34 percent, construct the​ firm's income statement. b. Compute the​ firm's operating profit margin. c. What was the times interest​ earned? a. Assuming the​...
The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement...
The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (22,000 tires at $64 each) $ 1,408,000 Variable costs (22,000 tires at $32) 704,000 Fixed costs 420,000 Earnings before interest and taxes (EBIT) $ 284,000 Interest expense 51,000 Earnings before taxes (EBT) $ 233,000 Income tax expense (25%) 58,250 Earnings after taxes (EAT) $ 174,750 a. Compute the degree of operating leverage. (Round your answer to...
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses...
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 2,160,000 Variable expenses 1,080,000 Contribution margin 1,080,000 Fixed expenses 180,000 Net operating income $ 900,000 Required: Answer each question independently based on the original data: 1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point...