Question

Break-even, Financial and Operating Leverages

Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
Sales (40,000 bags at $50 each) ..................................	$2,000,000
Less: Variable costs (40,000 bags at $25)................	1,000,000
Fixed costs..............................................................	600,000
Earnings before interest and taxes ..............................	400,000
Interest expense ...........................................................	120,000
Earnings before taxes .................................................	280,000
Income tax expense (20%) ..........................................	56,000
Net income ..................................................................	$ 224,000

Based on the information above, calculate (show all calculations and responses in good form):

1. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?

2. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

3. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

Answer 1

Page-1 Answers Break-even, financial and Operating Leverages. according to the given question the answer is provided below: Sales (40,000 bogs at $50 each) – $2,000,000 less: Variable cost(40,000 bags at $25 each) $1,000,000 - contribution = $1,000,000 less: fixed cost - $ 600,000 Earnings before interest & Taxes = $400,000 less: Interest Expenses -$120,000 . Earning before Tax (EBT) = $280,000 less: Income Tax Expenses/20-4)=$ 56,000 =$224,000 Net Income

a) Break -Even Pointi- In units = fixed cost contribution per unit $60,0000 - $50 (25) = 600,000 - 24,000 bags 25 in dollars - fixed cost #ply ratio Plu ration - contribution sales = 600,000 1,000,000 0.50 2,000,000 - $1,200,000 - 0.5 of 50% Break Even-point is that point of production where there is no profit no loss on the produced units, it means - Revenue = Expenses so, as a manager, first of all I will analyse the whole scenario, if I found that the production of more bags will

ERTT give me profits then I will take the decision of to increase my production beyond the Berako 1. Ever point (in both cases units and dolleros) otherwise not b) Degree of financial Leverage = EBT = $ 400,000 $ 280,000 - 1.43 The advantage of fL arises the possibilities that funds borrowed at a fixed interest rate can be used for investment opportunities earning a rate of return higher than the interest paid. Higher the fh shows a good condition of the firm but with high debt financing.so fc helps to calculate the gisk from debt financing.

c)Degree of Operating Leverage = contribution EBIT - 11000,000 400,000 = 2.5 Degree of a tells the impact of change in sales on the level of operating profits of the firm. A high DOL condition is a high rish situation and even a small decrease in sales can excessively offert the firm's efforts to record profits. This number is used to measure the risky situations in the financial planning