9. Play-More Toys produces inflatable beach balls, selling 400,000 balls per Int

ID: 2586243 • Letter: 9

Question

9. Play-More Toys produces inflatable beach balls, selling 400,000 balls per Integrative-Multiple leverage measures year. Each ball produced has a variable operating cost of $0.82 and sells for $1.08. Fixed operating costs are $31,000. The firm has annual interest charges of $6,400, preferred dividends of $1,500, and a 40% tax rate. a. Calculate the operating breakeven point in units. b. Use the degree of operating leverage (DOL) formula to calculate DOL c. Use the degree of financial leverage (DFL) formula to calculate DFL d. Use the degree of total leverage (DTL) formula to calculate DTL. Compare this to the product of DOL and DFL calculated in parts (b) and (c). a. The operating breakeven point in units is b. The degree of operating leverage is c. The degree of financial leverage is d. The degree of total leverage is Compare this to the product of DOL and DFL calculated in parts (b) and (c) The degree of total leverage is units. (Round to the nearest integer.) (Round to four decimal places.) Round to four decimal places.) Round your answer to two decimal places.) Round your answer to two decimal places.) The values for the degree of total leverage calculated above are (1) (Note: If the difference between the two calculated values above is 0.01 or less, these are considered as equal values. Select from the drop-down menu.) (1) O equal O different

Explanation / Answer

Income Statement

Particulars

(In $)

Sales (400,000 balls * $1.08)

432,000

Variable cost (400,000 * 0.82)

328,000

Contribution Margin @$0.26 p.u. (1.08 – 0.82)

104,000

Fixed Cost

31,000

Net Operating Income(EBIT)

73,000

Interest

6,400

Earnings before Tax (EBT)

66,600

Tax@40%

26,640

Earnings After Tax (EAT)

39,960

Preference Dividend

1,500

Earnings available to Equity Holders

38,460

= 31,000 / $0.26 p.u.

Breakeven point = 119,231 Units

= 104,000 / 73,000

DOL = 1.43

= 73,000 / 66,600

DFL = 1.1

= 104,000 / 66,600

DTL = 1.56

Alternative formula

DTL = DOL * DFL

= 1.43 * 1.1

DTL by alternate formula = 1.573

The difference between DTL is same as there is a difference of only 0.01 which is considered to be equal.

Equal