Case Study 1

You manage Minimi Pty Ltd you wish to do an analysis of your organization's current situation and report back to the board of directors the following information.

The information is as follows:

Recently sold 100,000 units of at $7.50 each; its variable operating costs are $3.00 per unit and its fixed operating cost are $250,000.

The annual interest charges total $80 000 and the firm has 80 000 shares of $0.50 of annual dividend preference capital outstanding. It currently has 200 000 shares of ordinary equity outstanding.

Assume that the firm has a 40 % tax rate.

a) At what level in units would the firm, break even on operations where EBIT = $0

b) Calculate the firm EPS in table form at

1) Current level of sales and

2) A 120,000 unit sales level.

c) Using 750,000 sales levels as a base calculate the firm's DOL.

d) Using the EBIT associated with the sales level of 750 000 as a base, what is the firm's DFL

e) Using the degree of total leverage DTL idea, determine 50% increase in sales from

$750,000 base level on its EPS.