Eaton Tool Company has fixed costs of $255,000, sells its units for $66, and has variable costs of $36 per unit.
- a. Compute the break-even point.
- b. Ms. Eaton comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be required, which will increase variable costs per unit to $39. The sales price will remain at $66. What is the new break-even point?
- c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?
- The Sterling Tire Company’s income statement for 2013 is as follows:
Degree of leverage
|STERLING TIRE COMPANY
For the Year Ended December 31, 2013
|Sales (20,000 tires at $60 each)||$1,200,000|
|Less: Variable costs (20,000 tires at $30)||600,000|
|Earnings before interest and taxes (EBIT)||$ 200,000|
|Earnings before taxes (EBT)||$ 150,000|
|Income tax expense (30%)||45,000|
|Earnings after taxes (EAT)||$ 105,000|
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.
- International Data Systems information on revenue and costs is only relevant 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.
Nonlinear breakeven analysis
- a. Compute operating income at 105,000 units.
- b. Compute operating income at 205,000 units.
Short-term versus longer-term borrowing
- Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.