5. The Wayne Company manufactures and sells doors to home builders. The doors ar
ID: 2807856 • Letter: 5
Question
5. The Wayne Company manufactures and sells doors to home builders. The doors are sold for $25 each. Variable costs are $15 per door, and fixed operating costs total $50,000 which include depreciation in the amount of $2,000. The company is currently selling 6,000 doors per year. The company has total financial charges of $2,000, half in interest expense and half in preferred stock dividends. The corporate tax rate is 40% a. Calculate the break-even point. b. Calculate the cash break-even point. c. Calculate the degree of operating leverage. d. Determine the degree of financial leverage. e. What is the degree of combined leverage in this case? f. If the company would be able to double its sales, what would be the percentage increase in operating profit and in EPS?Explanation / Answer
wayneCompany
Q = 6,000, P = $25, VC = $15, FC = $50,000, I= $1,000, D = $2,000
a. BE= $50,000 / $25 - $15
= $50,000 / $10
= 5,000 units
a. Cash BE= ($50,000 - $2,000) / $25 - $15
= $48,000 / $10
= 4,800 units
c. DOL = Q(P - VC) / Q(P- VC) – FC
= 6,000($25-$15) / 6,000($25 - $15) - $50,000
= 6,000($10) / 6,000($10) - $50,000
= $60,000 / $60,000 - $50,000
= $60,000 / $10,000
= 6x
d. DFL = EBIT / EBIT – I
= $10,000 / $10,000 - $1,000
= $10,000 / $9,000
= 1.11x
e. DCL= Q(P - VC) / Q(P-VC)- FC-I
= 6,000($25 - $15)/ 10,000($25-$15)-$50,000-$1,000
= $60,000 / $60,000-$50,000-$1,000
= $60,000 / $9,000
= 6.67x
f.
Orginal sales
Units
Rate
Amount
Sales
6000
25
150000
Less: Variable cost
6000
15
90000
Contribution margin
6000
10
60000
Less: Fixed Cost
50000
EBIT
10000
Less: Interest
1000
EBT
9000
Tax at 40%
3600
Net income(OP. profit)
5400
Less: Preferred dividend
1000
Income attr. To common stockholders
4400
Sales double
Units
Rate
Amount
Sales
12000
25
300000
Less: Variable cost
12000
15
180000
Contribution margin
12000
10
120000
Less: Fixed Cost
50000
EBIT
70000
Less: Interest
1000
EBT
69000
Tax at 40%
27600
Net income(OP. profit)
41400
Less: Preferred dividend
1000
Income attr. To common stockholders
40400
Operating profit increase
((41400-5400)/5400)
667%
EPS increase
40400-4400/4400
818%
Orginal sales
Units
Rate
Amount
Sales
6000
25
150000
Less: Variable cost
6000
15
90000
Contribution margin
6000
10
60000
Less: Fixed Cost
50000
EBIT
10000
Less: Interest
1000
EBT
9000
Tax at 40%
3600
Net income(OP. profit)
5400
Less: Preferred dividend
1000
Income attr. To common stockholders
4400
Sales double
Units
Rate
Amount
Sales
12000
25
300000
Less: Variable cost
12000
15
180000
Contribution margin
12000
10
120000
Less: Fixed Cost
50000
EBIT
70000
Less: Interest
1000
EBT
69000
Tax at 40%
27600
Net income(OP. profit)
41400
Less: Preferred dividend
1000
Income attr. To common stockholders
40400
Operating profit increase
((41400-5400)/5400)
667%
EPS increase
40400-4400/4400
818%
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