Question

question one please help

Part Three - Problems. Answer Three out of Four Problems Each is Worth One Two-Thirds (1.66) Points. 1. Easy Go produces summer straw hats, selling 330,000 hats per year. Each hat produced has a variable operating cost of $1.25 and sells for $2.50. Fixed operating costs are $32,000. The firm has annual interest charges of $5,000, and a 40% tax rate. Now calculate the following: a. Operating Break-Even point in units Decree of Operating Leverage (DOL) b. Degree of Financial Leverage (DFL) C. Degree of Combined Leverage (DCL) d. e. Also compare DCL to the product of DOL and DCL calculated in parts b and c Show Your Calculation:

Answer 1

1) Operating Break even point in Units 25600 Units Operating Break even point = Total Fixed Cost / Contribution Margin per Unit = $ 32000 / $ 1.25 25600 Units Working Note: Contribution Margin per unit = Selling price - vairable cost per unit = $ 2.50 - $ 1.25 = $ 1.25 Degree of Operating Leverage 1.0841 Degree of Operating Leverage Contribution Margin / Operating Income $ 412500 / $ 380500 1.0841

1.0841 Working Notes : Contribution Margin Units Sold Contribution Margin per unit Total Contribution Margin $ $ $ 330,000 1.25 412,500 Operating Income or EBIT Total Contribution Margin Less: Fixed Cost Operating Income (EBIT) $ $ $ 412,500 (32,000) 380,500 Degree of Financial Leverage 1.0133 Degree of Financial Leverage Earnings before interest and taxes / Earnings before taxes $ 380500 / $ 375500 1.0133

Working Note: Earnings before taxes = EBIT - Interest = $380500 - $ 5000 = 375500 d) Degree of Combined Leverage 1.0985 Degree of Combined Leverage Contribution Margin / Earnings Before taxes $ 412500/$ 375500 1.0985 e) Degree of Combined Leverage (DCL) = Degree of Operating Leverage (DOL) * Degree of Financial Leverage (DFL) DCL = DCL DCL DOL * DFL 1.0841*1.0133 1.0985