Chapter_5_-_Moodle_Ready

Chapter_5_-_Moodle_Ready - Chapter 5 Problems 5-A. Shawn...

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Chapter 5 Problems 5-A. Shawn Penn & Pencil Sets, Inc., has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce costs per unit to $2.00. As a result of Bic’s suggestion, will the break-even point go up or down? Compute the necessary numbers. 5-A. Solution: . $80,000 $80,000 BE (before) 32,000 units $5.00 $2.50 $2.50 = = = - $120,000 $120,000 BE (after) 40,000 units $5.00 $2.00 $3.00 = = = - The break-even point will go up.
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5-B. The Sterling Tire Company’s income statement for 2008 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2008 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: a . Degree of operating leverage. b . Degree of financial leverage. c . Degree of combined leverage. d . Break-even point in units. 5-B. Solution: Sterling Tire Company Q = 20,000, P = $60, VC = $30, FC = $400,000, I = $50,000 a. Q(P VC) DOL Q(P VC) FC 20,000($60 $30) 20,000($60 $30) $400,000 20,000($30) 20,000($30) $40,000 $600,000 $600,000 3.00x $600,000 $400,000 $200,000 - = - - - = - - = - = = = -
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b. EBIT $200,000 DFL EBIT I $200,000 $50,000 $200,000 1.33x $150,000 = = - - = = c. Q (P VC) DCL Q(P VC) FC I 20,000($60 $30) 20,000($60 $30) $400,000 $50,000 $600,000 $600,000 4x $600,000 $400,000 $50,000 $150,000 - = - - - - = - - - = = = - - d. $400,000 $400,000 BE 13,333 units $60 $30 $30 = = = - 5-C. Healthy Foods, Inc. Sells 50-pound bags of grapes to the military for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of the grapes are $.10 per pound. a . What is the break-even point in bags? b . Calculate the profit or loss on 12,000 bags and on 25,000 bags. c . What is the degree of operating leverage at 20,000 bags and at 25,000 bags? Why does the degree of operating leverage change as the quantity sold increases? d . If Healthy Foods has an annual interest expense of $10,000, calculate the degree of financial leverage at both 20,000 and 25,000 bags. e
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Chapter_5_-_Moodle_Ready - Chapter 5 Problems 5-A. Shawn...

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