CellU would have to take out a loan to begin the cell phone case business, so they would like to know how a change in sales will affect their bottom line. The interest expense on the loan would be $10,000 per year. CellU has 15,000 common shares outstanding; their tax rate is 40%. The cases will be sold for $20 each, have a variable operating cost of $13 per case, and annual fixed operating costs of $70,000. CellU can sell 20,000 cell phone cases per year. Show the steps.
a. Compute the degree of operating leverage for CellU.
b. Compute the degree of financial leverage for CellU.
c. Compute the degree of total leverage for CellU.
d. Calculate the EPS for the cell phone cases.
e. If CellU can increase their sales units to 30,000 per year, use the DOL, DFL, and DTL to calculate the estimated changes in EBIT and EPS.