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Chapter 2: 14BP_a (page 148)

International Data Systems鈥� information on revenue and costs is relevant only up to a sales volume of 105,000 units. After 105,000 units, the market becomes saturated and the price per unit falls from \(14.00 to \)8.80. Also, there are cost overruns at a production volume of over 105,000 units, and variable cost per unit goes up from \(7.00 to \)8.00. Fixed costs remain the same at $55,000.

a. Compute operating income at 105,000 units.

Short Answer

Expert verified

The Operating income of the company is $680,000.

Step by step solution

01

Contribution per unit

Contribution=Revenueperunit-Variablecostperunit=$14-$7=$7

02

Operating income

Opeartingincome=Contribution脳No.ofunits-Fixedcost=$7脳105,000-$55,000=$680,000

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Most popular questions from this chapter

DeSoto Tools Inc. is planning to expand production. The expansion will cost \(300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at \)30 per share. The current income statement before expansion is as follows:

DeSOTO TOOLS, INC.

Sales

\(1,500,000

Less: Variable cost

\)450,000

Fixed cost

550,000

1,000,000

Earning before interest and taxes

\(500,000

Less: Interest expenses

100,000

Earning before taxes

\)400,000

Less: Taxes @34%

136,000

Earning after taxes

\(264,000

Shares

100,000

Earning per shares

\)2.64

After the expansion, sales are expected to increase by \(1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to \)800,000. The tax rate is 34 percent.

c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion.

The Haines Corp. shows the following financial data for 20X1 and 20X2:

20X1

20X2

Sales

\(3,230,000

\)3,370,000

Cost of goods sold

2,130,000

2,850,000

Gross profits

\(1,100,000

\)520,000

Selling and administrative expenses

298,000

227,000

Operating profits

\(802,000

\)293,000

Interest expense

47,200

51,600

Income before taxes

\(754,800

\)241,400

Taxes (35%)

264,180

84,490

Income after tax

\(490,620

\)156,910

For each year, compute the following and indicate whether it is increasing or

decreasing profitability in 20X2 as indicated by the ratio:

a. Cost of goods sold to sales.

The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:

STERLINE TIRE COMPANY

Income Statement

For the year ended December 31, 20X1

Sales (20,000 tires at \(60 each)

\)1,200,000

Less: variable costs (20,000 tires at \(30)

600,000

Less: fixed cost

400,000

Earnings before interest and taxes (EBIT)

\)200,000

Interest expenses

50,000

Earning before taxes (EBT)

\(150,000

Income tax expenses (30%)

45,000

Earning after taxe (EAT)

\)105,000

Given this income statement, compute the following:

b. Degree of financial leverage.

Conn Man鈥檚 Shops, a national clothing chain, had sales of \(350 million last year. The business has a steady net profit margin of 9 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown next. The firm鈥檚 marketing staff has told the president that in the coming year

there will be a large increase in the demand for overcoats and wool slacks. A

sales increase of 20 percent is forecast for the company.

BALANCE SHEET

End of year (in \) million)

Assets

Liabilities and Stockholder鈥檚 equity

Cash

\(25

Accounts payable

\)64

Accounts receivable

40

Accrued expenses

31

Inventory

82

Other payables

45

Plant and equipment

133

Common stock

50

Retained earnings

90

Total assets

\(280

Total liabilities and stockholder鈥檚 equity

\)280

All balance sheet items are expected to maintain the same percent-of-sales relationships as last year,* except for common stock and retained earnings. No change is scheduled in the number of common stock shares outstanding, and retained earnings will change as dictated by the profits and dividend policy of the firm. (Remember the net profit margin is 9 percent.)

b. What would be the need for external financing if the net profit margin went up to 10.5 percent and the dividend payout ratio was increased to 60 percent? Explain.

A-Rod Fishing Supplies had sales of \(2,500,000 and cost of goods sold of \)1,710,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,680,000. What was the firm鈥檚 operating profit?
See all solutions

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