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Unformatted text preview: $2.50
per unit, variable operating costs of $1.00 per unit, and fixed operating costs of
$62,500. Interest is $17,500 per year. Assume that both firms are in the 40%
a. Compute the degree of operating, financial, and total leverage for firm R.
b. Compute the degree of operating, financial, and total leverage for firm W.
c. Compare the relative risks of the two firms.
d. Discuss the principles of leverage that your answers illustrate. LG2 12–15 Integrative—Multiple leverage measures and prediction Carolina Fastener,
Inc., makes a patented marine bulkhead latch that wholesales for $6.00.
Each latch has variable operating costs of $3.50. Fixed operating costs are
$50,000 per year. The firm pays $13,000 interest and preferred dividends of
$7,000 per year. At this point, the firm is selling 30,000 latches a year and is
taxed at 40%.
a. Calculate Carolina Fastener’s operating breakeven point.
b. On the basis of the firm’s current sales of 30,000 units per year and
its interest and preferred dividend...
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