Problem:
Millennium Corp, Inc. has a base level of sales of 150,000 units. Sales price per unit is $10.00 and variable cost per unit is $6.50. Total annual operating fixed costs are $155,000, and the annual interest expense is $90,000. (For consistency with answers below, carry all calculations to two decimals.)
1) What is base level EBIT?
2) What is Millennium Corp.'s operating leverage? Provide an interpretation to describe Millennium's degree of operating leverage.
3) Assume that Millennium expects units sold to increase 20%. What will be the resulting percentage change in EBIT?
4) What will be the new level of EBIT given the expected 20% increase in units sold?
5) Calculate Millennium's degree of financial leverage. Provide an interpretation to describe Millennium's degree of financial leverage.
6) Calculate Millennium's degree of combined leverage. Provide an interpretation to describe Millennium's degree of combined leverage.
7) Assume that Millennium expects units sold to increase 20%. What will be the resulting percentage change in earnings per share?
8) Assume that Millennium's current level of earnings per share is $2.00. What will be the new level of earnings per share given the expected 20% increase in units sold?