Question

Lens Company has variable operating cost of 16 per unit

Each of the following question is accounted 10 points. Please show the deta work in order to get full credits. 1. Lens Company has variable operating cost of $16 per unit and sell pri of $25 per unit if company's operating break-even point is 3500 unit: a) What is the fixed operating cost? b) If company produce 5000 units what is company's EBIT? c) Calculate the degree of operating leverage when company make 6000 units. 2. A financial company is going to borrow $5 million for 3 months. The company has three options: A. a commercial bank offering a 5% annual rate loan; B. an insurance firm can provide a 4.4% annual rate discount loan and C. a brokerage can provide a 4% annual rate loan with 8% compensation balance. a) What is the effective annual rate for each option assume that the company has no any deposit in each organization? b) Which option should the company use to borrow money? 3. Smart Inc. is going to purchase a $12.000 machine. The vendor offered a term of 3/15 net 45 of payment. a) If Smart take cash discount when should company make payment and

Answer 1

1.a) The per unit selling price is $25 while variable cost is $16 per unit. Therefore, contribution per unit is: Selling price per unit - Variable cost per unit = $25 - $16 = $9. We know:

Break-even point = Fixed costs/Contribution per unit

or, fixed costs = 3500 X $9 = $31,500.

1.b) The computation of EBIT of the company if it produces 5,000 units is as follows:

Sales (5,000 X $25)	$1,25,000
(-) Variable costs (5,000 X $16)	$80,000
Contribution	$45,000
(-) Operating fixed costs	$31,500
EBIT	$13,500

1.c) The DOL of the company when it produces 6,000 units is computed as below:

Sales (6,000 X $25)	$1,50,000
(-) Variable costs (6,000 X $16)	$96,000
Contribution	$54,000
(-) Operating fixed costs	$31,500
EBIT	$22,500

Therefore, DOL = Contribution / EBIT = $54,000 / $22,500 = 2.4.