Question

Selling Price $70 $90 $120 $100 Unit Sales 1,200,000 900,000 700.000 1,000,000 Interest Expense 3,390,000 2,716,667 2,948,000 4,142,857 Variable Costs (% of Sales) 57% 55% 53% 60% Fixed Costs $9,000,000 $12,000,000 $10,000,000 $11,000,000 Return on Common Equity 11% 10% 9% 8% Common Equity $120,000,000 110,000,000 150,000,000 $140,000,000 Common Shares 13,000,000 12,000,000 15,000,000 14,000,000 1. Using the financial data given in the above table, create income statements for each firm. Assume a common tax rate of 40% for each company. 2. Determine the break-even points in both units and dollars, and the degrees of operating, financial, and combined leverage for each firm. 3. How many units would each company need to sell in order to achieve EBIT of $15M? 4. Create a column chart that shows the various leverage measures for each company. All companies should be in one chart.

Answer 1

Since no details of previous year financials are avaliable, we calculate the required details as follows and consider the figures for 4 firms.

Part1:

Income Statement
Revenues
Net sales (SP* Unit Sales)	$8,40,00,000.00	$8,10,00,000.00	$8,40,00,000.00	$10,00,00,000.00
Total Revenue	$8,40,00,000.00	$8,10,00,000.00	$8,40,00,000.00	$10,00,00,000.00
Expenses
Variable Costs (% of sales)	$4,78,80,000.00	$4,45,50,000.00	$4,45,20,000.00	$6,00,00,000.00
Fixed costs	$90,00,000.00	$1,20,00,000.00	$1,00,00,000.00	$1,10,00,000.00
Interest expenses	$33,90,000.00	$27,16,667.00	$29,48,000.00	$41,42,857.00
Income tax expenses ( Note1)	$94,92,000.00	$86,93,333.20	$1,06,12,800.00	$99,42,857.20
Total Expense	$6,97,62,000.00	$6,79,60,000.20	$6,80,80,800.00	$8,50,85,714.20
Net income	$1,42,38,000.00	$1,30,39,999.80	$1,59,19,200.00	$1,49,14,285.80
Earning per share	1.10	1.09	1.06	1.07

Working Note-

1. Income tax expense- (Net revenue- (Variable cost + Fixed cost + Interest expense))*40%

2. Net Income- Total revenue- total expense

3. Earning per share- Net income/ Common shares

Part2: Calculation of break even points and degree of operating, financial and combined leverage for each firm:

Break even point
Sales (Selling price per unit * Unit sales)	$8,40,00,000.00	$8,10,00,000.00	$8,40,00,000.00	$10,00,00,000.00
Less: Variable costs (% of sales)	$4,78,80,000.00	$4,45,50,000.00	$4,45,20,000.00	$6,00,00,000.00
Contribution	$3,61,20,000.00	$3,64,50,000.00	$3,94,80,000.00	$4,00,00,000.00
Less: Fixed costs	$90,00,000.00	$1,20,00,000.00	$1,00,00,000.00	$1,10,00,000.00
Profit	$2,71,20,000.00	$2,44,50,000.00	$2,94,80,000.00	$2,90,00,000.00
Contribution pe unit( total contribution/ Unit sales)	$30.10	$40.50	$56.40	$40.00
Break even point in units (Fixed cost/ Contribution per unit)	2,99,003.32	2,96,296.30	1,77,304.96	2,75,000.00
Break even point in dollars (BEP in units* No of units	$2,09,30,232.56	$2,66,66,666.67	$2,12,76,595.74	$2,75,00,000.00
EBIT	$2,71,20,000.00	$2,44,50,000.00	$2,94,80,000.00	$2,90,00,000.00
EBIT- Interest	$2,37,30,000.00	$2,17,33,333.00	$2,65,32,000.00	$2,48,57,143.00
Operating leverage (Contribution/ EBIT)	1.33	1.49	1.34	1.38
Financial leverage (EBIT/ (EBIT-Interest))	1.14	1.13	1.11	1.17
Combined leverage (Operating leverage * financial leverage)	1.52	1.68	1.49	1.61

Working note:

SP	$70.00	$90.00	$120.00	$100.00
Unit Sales	12,00,000.00	9,00,000.00	7,00,000.00	10,00,000.00
Total sales	$8,40,00,000.00	$8,10,00,000.00	$8,40,00,000.00	$10,00,00,000.00
Interest expense	$33,90,000.00	$27,16,667.00	$29,48,000.00	$41,42,857.00
Vairable costs (% of sales)	57%	55%	53%	60%
Fixed costs	$90,00,000.00	$1,20,00,000.00	$1,00,00,000.00	$1,10,00,000.00
Return on common equity	11%	10%	9%	8%
Common equity($)	$12,00,00,000.00	$11,00,00,000.00	$15,00,00,000.00	$14,00,00,000.00
Common shares	1,30,00,000.00	1,20,00,000.00	1,50,00,000.00	1,40,00,000.00

Part 3: Calculation of units to be sold to achieve EBIT of $15M:

Unit sales= (desired profit + FC)/ cotribution per unit	7,97,342.19	6,66,666.67	4,43,262.41	6,50,000.00
	(15000000+9000000)/30.1	(15000000+12000000)/40.5	(15000000+10000000)/56.4	(15000000+11000000)/40