a.
Operating Break-even point = Fixed cost /Contribution margin
= Fixed cost / (Sales – Variable cost)
= $ 32,000/ ($ 1.25 - $ 0.86)
= $ 32,000/ $ 0.39 = 82,051.282051282 or 82,051 balls
b.
Degree of operating leverages = Q (P – V)/ Q (P – V) – F
Q = Number of units =
P = Price per unit = $ 1.25
V = Variable cost per unit = $ 0.86
F = Fixed cost = $ 32,000
Degree of operating leverages = 380,000 ($ 1.25 - $ 0.86)/ 380,000 ($ 1.25 - $ 0.86) – $ 32,000
= 380,000 x $ 0.39 / (380,000 x $ 0.39 – $ 32,000)
= $ 148,200/ ($ 148,200 - $ 32,000)
= $ 148,200/ $ 116200 = 1.27538726333907 or 1.28
3.
DFL = EBIT/ [EBIT – I – (PD x 1/(1-T))]
I = Interest charges = $ 6,300
PD = Proffered dividend = $ 1,900
T = Tax rate = 0.4
EBIT = (P x Q) – FC – (Q x VC)
= $ 1.25 x 380,000 - $ 32,000 - 380,000 x $ 0.86
= $ 475,000 - $ 32,000 - $ 326,800
= $ 116,200
DFL = $ 116,200/ [$ 116,200 – $ 6,300 – ($ 1,900 x 1/ (1-0.4))]
= $ 116,200/ [$ 116,200 – $ 6,300 – ($ 1,900 / 0.6)]
= $ 116,200/ ($ 116,200 – $ 6,300 – $ 3,166.666667)
= $ 116,200/ 106733.443333
= 1.088694474 or 1.09
4.
DTL = [Q x (P-VC)]/ [Q x (P-VC) – FC – I – (PD/(1-T)]
= [380,000 x ($ 1.25 - $ 0.86)]/ [380,000 x ($ 1.25 - $ 0.86) – $ 32,000 – $ 6,300 – ($ 1,900 x1/ (1-0.4))]
= (380,000 x $ 0.39)/ [380,000 x $ 0.39 – $ 32,000 – $ 6,300 – ($ 1,900 / 0.6)]
= $ 148,200/ ($ 148,200 – $ 32,000 – $ 6,300 – $ 3,166.666667)
= $ 148,200/ $ 106,733.443333
= 1.388505752 or 1.39
DTL = DOL x DFL = 1.27538726333907 x 1.088694474 = 1.388507066 or 1.39
Computation of DTL using two formulas give the same results.
Integrative Multiple leverage measures Play-More Toys produces inflatable beach balls, selling 380,000 balls per year. Each...
question 1 Part Three - Problems. Answer Three out of Four Problems Play-More Toys produces inflatable beach balls, selling 400,000 balls per year. Each Dan produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6.000, and a 40% tax rate. Now calculate one following: a. Operating Break-Even point in units b. Decree of Operating Leverage (DOL) c. Degree of Financial Leverage (DFL) d. Degree of...