Question: Tri-Star Productions, Inc. is evaluating two different operating structures which are described below. The firm has annual interest expense of $250, common shares outstanding of 1,000, and a tax rate of 40 percent.
Fixed
Costs Price
per Unit Variable Cost
per Unit
operating structure 1: $500 $1 $0.75
operating structure 2: $1,200 $1 $0.70
(a) For each operating structure, calculate
(a1) EBIT and EPS at 10,000, 20,000, and 30,000 units.
(a2) the degree of operating leverage (DOL) and degree of total leverage (DTL) using 20,000 units as a base sales level.
(a3) the operating breakeven point in units.
(b) Which operating structure has greater operating leverage and business risk?
(c) If Tri-Star Productions, Inc. projects sales of 20,000 units, which operating structure is recommended?