Break even Analysis Mini Case
Camping USA Inc. has only been operating for 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and the owner and CEO, Tom Charles, has decided that this is the right time to know more about the business and financial risks his company must deal with. For this, the CFO has asked you to prepare an analysis to support him in his next meeting with Tom Charles a week from today.
To make the required calculations, you have put together the following data regarding the cost structure of the company:
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Output level
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120,000 units
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Operating assets
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$6,000,000
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Operating asses turnover
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12 times
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Return on operating assets
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48%
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Degree of operating leverage
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10 times
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Interest expense
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$720,000
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Tax rate
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42%
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The CFO has instructed you to first determine the break-even point in units of output for the company. He requires that you prepare supporting documents, which demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to prepare an analytical income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CEO, you also need to prepare answers to the following questions:
a. What is the firm's break-even point in sales dollars?
b. If sales should increase by 40 percent, by what percentage would EBT (earnings before taxes) and net income increase?
c. Prepare another income statement, this time to verify the calculations from part d.