Integrative-Multiple leverage measures Play-More Toys variable operating cost of

Question

Integrative-Multiple leverage measures Play-More Toys variable operating cost of $0.88 and sells for $1.02. Fixed operating costs are $31.,000. The fim has annual produces inflatable beach balls, selling 390.000 bals per year. Each ball produced has a dividends of $1.800, and a 40% tax rate. a. Calculate the b. Use the degree of operating leverage (DOL) formula to calculate DOL operating breakeven point in units d. use he degre of to ttoaae ompare thi to the produt of DOL and DFL calcusted n rts t) an a. The operating breakeven point in units is units (Round to the nearest integer) b. The degree of operating leverage is (Round to four decimal places.) c. The degree of financial leverage is (Round to four decimal places) d. The degree of total leverage is (Round your answer to two decimal places.) Compare this to the product of DOL and DFL calculated in parts (b) and (c). The degree of total leverage is(Round your answer to two decimal places.) The values for the degree of total leverage calculated above are (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 different

Explanation / Answer

a. Operating break even = FC/(P-VC)

= 31,000/(1.02-0.88)

= 221,429 units

b. DOL = [Q*(P-VC)]/[Q*(P-VC)]-FC

= [390,000*(1.02-0.88)]/[ 390,000*(1.02-0.88)] – 31000

= 54600/23600

= 2.3136

c. EBIT = (P*Q)-FC-(Q*VC) = (1.02*390,000) – 31,000-(390,000*0.88)

= 23,600

Thus DFL = EBIT/[EBIT – I – (PD*(1/(1-t)]

= 23600/(23600-6300-(1800/(1-40%))

= 1.6503

d. DTL = [Q*(P-VC)]/Q*(P-VC)-FC-I-(PD/1-t)]

= 390,000*(1.02-0.88)/390,000*(1.02-0.88)-31000-6300-(1800/0.6)

= 3.82

Now DTL = DOL*DFL = 2.3136*1.6503

= 3.82

The values for the degree of total leverage calculated above are equal.

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