Question $2$

Heat Inc. sells computer hard drives, and the market is competitive $($i$.$e$.,$ sales price will not be affected

by Heat$$s sales volume$).$ Its EBIT for $2022$ was $$69,000$ when the sales quantity was $500$ units. In $2023,$

its EBIT was $$119,000$ when the sales quantity was $700$ units.

a$)$ Calculate its contribution margin per unit and total fixed costs.

b$)$ Calculate the degree of operating leverage for $2022$ and $2023.$

c$)$ If Heat changes its production technology by doubling its fixed costs and the breakeven

$($indifferent$)$ quantity is $1,120$ units, find the new contribution margin.

Heat has $$40,000$ debt that pays annual interest of $15\%$ and $2,000$ outstanding common shares that are

trading at $$25.$ Its tax rate is $30\%.$

d$)$ Calculate EPS for $2022$ and $2023.$

e$)$ Calculate the degree of financial leverage for $2022$ and $2023.$

f$)$ Calculate the degree of total leverage for $2022$ and $2023.$

g$)$ Heat considers borrowing $$20,000$ new debts $($that also pay $15\%$ interest$)$ to buy back common

shares $($at current price of $$25$ per share$),$ what is the breakeven $($indifferent$)$ sale quantity?