Red Hot, Inc manufactures outdoor cooking stove. The average selling price for the various units is $600. The associated variable cost is $400 per unit. Fixed costs for the firm average is $200,000 annually. Company has $1,000,000 debt paying 12% interest.
A) How many stoves should the firm produce and sell in order to break-even? what is the dollar sales volume the firm must achieve to reach the breakeven point? Show your answers graphically too.
B) Define the Degree of Operating Leverage (DOL), calculate it, and interpret it for this firm if the firm is planning to produce and sell 2,000 units of these stoves? What does DOL reflect?
C) Given your answer to part (c), what would be the projected effect upon EBIT (in %) if the firm's sales level should increase by 20%?
D) Define the Degree of Financial Leverage (DFL), calculate it, and interpret it if the firm sells 2,000 units. What does DFL reflect?
E) Define the Degree of Total Leverage (DTL) and given the above information, calculate it and interpret for this company. What does DFL reflect?
F) Given your findings above, is Red Hot using too much debt? How can the firm decrease various risks that it faces given what you have defined above?