Question

BWP projects sales of 100000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and fixed costs will be $2.4 million. BWP has $1 million in bonds outstanding, on which it pays 7.5%, and its marginal tax rate is 40%. There are 100000 shares of stock outstanding which trade at their book value of $30. Compute BWP's contribution, contribution margin, net income, DOL, and EPS. Round the answers to two decimal places. Enter your net income answer in whole dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2.

Contribution per unit	$
Contribution Margin	%
Net Income	$
DOL
EPS

Answer 1

Average sale price per unit		$50
Variable costs @ 40%	(50*40%)	$20
Contribution margin per unit	(50-20)	$30
Contribution margin ratio	(30/50)	60%
Sales revenue		5000000
Variable costs	(5,000,000*40%)	2000000
Contribution margin		3000000
Fixed costs		2400000
EBIT		600000
Interest	(1,000,000*7.5%)	75000
EBT		525000
Taxes @ 40%		210000
Net Income		315000
DOL = Contribution Margin/EBIT
DOL = 3,000,000/600,000 = 5
EPS = Net income/ Shares outstanding
EPS = 315,000/100,000 = 3.15 per share