1. Breakeven comparison: Algebraic
Given the price and cost data shown in the accompanying table for each of the three firms, F, G, and H, Answer the questions that follow.
|
Firm
|
|
|
F
|
G
|
H
|
|
Sale price per unit
|
|
$18.00
|
$21.00
|
$30.00
|
|
Variable operating cost per unit
|
6.75
|
13.5
|
12
|
|
Fixed operating cost
|
|
45,000
|
30,000
|
90,000
|
|
|
|
|
|
|
|
1. What is the operating breakeven point in units for each firm?
FIRM F: Q=$45,000 / ($18.00-$6.75) = 4,000 UNITS
FRIM G: Q=$30,000 / (21.00-$13.50) = 4,000 UNITS
FIRM H: Q=$90,000 / ($30.00-$12.00) = 5,000 UNITS
2. How would you rank these firms in firms of their risk?
Firm F and G are equal in risk but less risky than Firm H.
2. Breakeven analysis
Barry Carter is considering opening a video store. He wants to estimate the number of DVD's he must sell to break even. The DVD's will be sold for $13.98 each, variable operating costs are $10.48 per DVD, and the annual fixed operating costs are$ 73,500.
1. Find the operating breaking point in number of DVD's.
Q = $73,500 / (13.98-10.48) = 21,000 units
2. Calculate the total operating costs at the breakeven volume found in part a.
FC + (Q X VC)
$73,500 + (21,000 X $10.48) = $293,580
3. If Barry estimates that at a minimum he can sell 2,000 CD's per month, should he go into the video business?
2,000 X 12 = 24,000 CD's per year. 2,000 units per year are above operating breakeven by 3,000 units per year and he should go into the CD business.
4. How much EBIT will Barry realize if he sells the minimum 2,000 DVD's per month noted in part c?
EBIT = (P X Q) - FC (VC X Q)
EBIT = ($13.98 X 24,000) $73,500-($10.48 X 24,000)
EBIT= $335,520-$73,500-$251,250
EBIT = $10,500
3: Degree of operating leverage
Grey Products has a fixed operating cost of $380,000, variable operating costs of$16 per unit, and a selling price of $63.50 per unit.
1. Calculate the operating breakeven point in units.
Q=FC / (P-VC) = $380,000 / ($16.00-$63.50) = 23,687 UNITS
2. Calculate the firms EBIT at 9,000, 10,000, and 11,000 units respectively.
EBIT = (P X Q) - FC (VC X Q)
EBIT 9,000=
EBIT 10,000=
EBIT 11,000=
3. With 10,000 units as a base, what is the percentage changes in units sold and EBIT as sales move from the base to the other sales level used in part b?
4. Use the percentages computed in part c to determine the degree of operating leverage (DOL).
5. Use the formula for degree of operating leverage to determine the DOL at 10,000 units.
4: EPS calculations
Southland industries has $60,000 of 16% (annual interest) bonds outstanding, 1,5000 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the form has a 40% tax rate, compute earnings per share (EPS) for the following levels of EBIT:
1. $24,600
2. $30,600
3. $35,000
5: Degree of financial leverage
Northeastern Savings and loan has current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%.
1. Using the EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS).
2. Using the $80,000 of EBIT as a base, calculate the degree of financial leverage (DFL).
3. Rework part a. and part b. assuming the firm has $100,000 of 16% (annual interest) debt and 3,000 shares of common stock.