1. CompU's subsidiary, CellU, is growing its cell phone line to add cell phone cases. The cases may be sold for $20 each, have a variable operating cost of $13 per case, and yearly fixed operating costs of $70,000.
a. Evaluate the operating breakeven point of the cell phone cases?
b. Determine the total operating costs at the breakeven point.
c. If CellU can sell 20,000 cell phone cases per year, how much EBIT will CellU understand on the cases?
2. CellU would have to take out a loan to start the cell phone case business, so they could like to know how a change in sales will influence their bottom line. The interest expense on the loan could be $10,000 per year. CellU has 15,000 common shares outstanding; their tax rate is 40 percent. The sales and costs are the similar as in problem 1.
a. Evaluate the degree of operating leverage for CellU.
b. Evaluate the degree of financial leverage for CellU.
c. Determine the degree of total leverage for CellU.
d. Compute the EPS for the cell phone cases.
e. If CellU will increase their sales units to 30,000 per year, use the DOL, DFL, and DTL to evaluate the estimated changes in EBIT and EPS.