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PROBLEM 1 Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be
PROBLEM 1
Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%.
- How much is the fixed cost for the operation (assuming 25% target operating profit margin is achieved).
(2 marks)
- What is the breakeven point in dollars for the firm?
(1 mark)
- What is the degree of operating leverage (DOL)?
(1 mark)
- What is the degree of combined/total leverage (DCL/DTL)?
(2 marks)
- What will be its earnings per share if average annual sales drop by 20%?
(2 marks)
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