Problem: 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
- EBIT and EPS at 10,000, 20,000, and 30,000 units.
- the degree of operating leverage (DOL) and degree of total leverage (DTL) using 20,000 units as a base sales level.
- 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?