A company is trying to decide on their use of operating and financial leverage from among four choices. They can sell their product for $5 per unit. Their Interest Expense is the Interest Rate times Debt. Their Tax Rate is 40%

Fixed Costs Variable Costs Debt Interest Rate Equity

1. 50,000 $2.50 per unit 0 0% 400,000
2. 100,000 $1.50 per unit 0 0% 400,000
3. 50,000 $2.50 per unit 200,000 10% 200,000
4. 100,000 $1.50 per unit 200,000 10% 200,000

11. How many units must the firm sell in order to have an EBIT of $200,000 under option 1?

a. 50,000 b. 100,000 c. 150,000 d. 200,000 e. 250,000

12. What is their Degree of Operating Leverage under option 2 if they sell 80,000 units?

a. 1.23 b. 1.56 c. 1.82 d. 2.25 e. 2.87

13. What is their Degree of Financial leverage under option 4 if they have Sales of $300,000? (You may have to calculate the number of units sold)

a. 1.22 b. 1.67 c. 2.33 d. 2.71 e. 3.33

14. Their current Sales under option 3 is $200,000. If Sales increase by 10%, then Net Income will increase by how much?

a. 10% b. 20% c. 25% d. 33% e. 40%