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ABC Inc. produces hydro energy conversion systems which sell for $900 each. The firm's fixed costs, F, are $15,000; 60 units are produced and sold
ABC Inc. produces hydro energy conversion systems which sell for $900 each. The firm's fixed costs, F, are $15,000; 60 units are produced and sold each year; operating profits total $3,000; and the firm's assets (20% debt financed) are $60,000. The firm is considering increasing the size of its operation, adding $40,000 to total investment and $3,000 to fixed operating costs per year. The change will reduce the variable costs per unit by $120, and increase its output from 60 to 75 units, but the sales price on all units will have to be lowered to $800. The company's tax rate is 30%. The new investment will increase the company's debt ratio to 40%. Interest rate on all debt is 10%. Calculate the break-even quantity before and after the change. Calculate the degree of operating leverage, degree of financial leverage, degree of total leverage, and return on equity for the firm before and after the change. What is the estimated impact on leverage if the firm makes the change in production process
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