Question
1. (Operating leverage) The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various
1. (Operating leverage)
The Quarles Distributing Company manufactures an assortment of cold air intake systems for high-performance engines. The average selling price for the various units is $700.The associated variable cost is $250 per unit. Fixed costs for the firm average $ 200,000 annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to reach the break-even point?
c. What is the degree of operating leverage for a production and sales level of 3,000 units for the firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest and taxes if the firm's sales level should increase by 30 percent from the volume noted in part (c)?
What is the break-even point in units for the company? Units (Round to the nearest whole number.) ANSWER:
What is the dollar sales volume the firm must achieve to reach the break-even point? $ (Round to the nearest cent.) ANSWER:
What is the degree of operating leverage for a production and sales level of 3,000 units for the firm? Note that you can compare sales at a 10% higher level (3,300 units) in detemining the degree of operating leverage. (Round to three decimal places.) ANSWER:
d. What will be the projected percentage change in earnings before interest and taxes if the firm's sales level should increase by 30 percent from the volume noted in part (c)? % (Round to two decimal places.) ANSWER:
2. ACME, Inc. reported the following income statement for 2009:
Sales | $2,500,000 |
Variable Costs | 900,000 |
Fixed Operating Costs | 700,000 |
EBIT | 900,000 |
Interest Expense | 200,000 |
EBT | 700,000 |
Taxes (30%) | 210,000 |
Net Income | $490,000 |
Earnings Per Share | $4.90 |
|
|
If ACME's sales next year increase by 20%, ACME's EBIT will increase; ANSWER:
A.
over 35%, due to operating leverage.
B.
20%, showing no financial leverage.
C.
over 35%, due to operating leverage and financial leverage.
D.
20%, showing no operating leverage.
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