Question

Data Table Output level Operating assets Operating asset turnover Return on operating assets Degree of operating leverage Interest expense Tax rate (Click on the icon located on the top-right corner of the data table above in order to copy its contents into a spreadsheet.) 170,000 units $5,200,000 20 times 45% 8 times $700,000 39% Print Done

Answer 1

In the give question, it is important to find prepare the Income statement at first, by using all the given information.

We can calculate the total Sales amount by using the Operating Assets turnover ratio (20 times) and the Operating Assets amount ($5,200,000).

Operating Assets Turnover = Net Sales/Operating Assets

Thus, Net Sales = 20*($5,200,000) = $104,000,000.

Similarly, we can calculate the Net Income by using the Return on Operating Assets ratio (45%) and the Operating Assets amount ($5,200,000).

Return on Operating Assets = Net Income/ Operating Assets

Thus, Net Income = 45%*($5,200,000) = $2,340,000.

Using the Net Income amount, we can proceed to calculate the EBT (Earnings before Tax), by using the tax rate given as 39%. This EBT amount turns out to be $3,836,065.57

EBIT (Earnings before Interest and Tax) can be calculated by adding the Interest amount ($700,000) to EBT ($3,836,065.57). The EBIT amount turns out to be $4,536,065.57.

We can calculate the (Sales-Total Variable Cost) value, using the Degree of Operating leverage and EBIT amount.

Degree of Operating Leverage = (Sales-TVC)/EBIT

Thus, (Sales-TVC) = $36,288,524.56

Income Statement is shown below:

Particulars	Amount in $
Sales	$104,000,000.00
(-) Variable Cost	($67,711,475.44)
	$36,288,524.56
(-) Fixed Cost	($31,752,458.99)
EBIT	$4,536,065.57
(-) Interest	($700,000.00)
EBT	$3,836,065.57
(-) Tax	($1,496,065.57)
EAT	$2,340,000.00

(a) Firm's Break-even point in Sales dollars

Break-even Quantity = (Fixed Operating Costs+Fixed Financing costs)/(Price - Variable cost per unit)

Price per unit = Sales/ Output level = $611.76

Variable cost per unit = Variable cost/ Output level = $398.30

Break Even Quantity = ($31,752,458.99 + $700,000.00) / ($611.76 - $398.30) = 152,031 units.

Therefore Break even Sales = (152,031*$611.76) = $93,006,484.56.

(b)

A firm's degree of operating leverage (DOL) can also be defined as the percentage change in operating income (EBIT) that results from a given percentage change in sales.

DOL = (% change in EBIT)/(% change in Sales)

Therefore,

% change in EBIT = DOL * (% change in Sales)

% change in EBIT = 8* (20%) = 160%

New EBIT = $4,536,065.57*(1+160%) = $11,793,770.48.

New EBT = New EBIT - Interest = $11,793,770.48 - $700,000 = $11,093,770.48.

% change in EBT = ($11,093,770.48-$3,836,065.57)/($3,836,065.57) = 189%

This is similar to 160%*(Degree of financial leverage) = 160%(1.18) = 188.8%

DFL (Degree of Financial Leverage) can also be defined as the percentage change in Net Income that results from a given percentage changes in EBIT.

Thus, % change in Net Income = 1.18*(160%) = 188.8%

(c)

The revised Income Statement is shown below:

Particulars	Amount in $
Sales	$124,800,000.00
(-) Variable Cost	($81,253,825.03)
	$43,546,174.97
(-) Fixed Cost	($31,752,458.99)
EBIT	$11,793,715.98
(-) Interest	($700,000.00)
EBT	$11,093,715.98
(-) Tax	($4,326,549.23)
EAT	$6,767,166.75