Air filter ducts for $6 per unit. It has the folle Rent $100,000 Factory labor $1. 20 per unit Executive salaries $89000 Raw material s, 60 per unit Separate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of $6, compute the break-even point olution Air Filter. In Variable Costs(pel Fixed costs unit Rent $100.000 Factory lab $.20 Executive salaries $89000 Raw materials 60 $l89000 FC $189,000$189,000 BE 一=45000 units P-VC$6.00-$1.80$4.20 Copyright o2005 by The McGranr-Hill Companies, Inc. S-164
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-164 5-4. Air Filter, Inc. sells its products for $6 per unit. It has the following costs: Rent $100,000 Factory labor $1.20 per unit Executive salaries $89,000 Raw material $ .60 per unit Separate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of $6, compute the break-even point. Solution: Air Filter, Inc. Fixed Costs Variable Costs (per unit) Rent $100,000 Factory labor $1.20 Executive salaries $89,000 Raw materials _______ .60 $189,000 $1.80 45,000 units $4.20 $189,000 $6.00 $1.80 $189,000 P VC FC BE = = − = − =
Shawn Penn Pencil Sets, Inc has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce variable costs per unit to $2.00 As a result of Bic's suggestion, will the break-even point go up or down? Compute the necessary number Solution: Shawn penn Pencil sets. Inc $80,000$80.000 BE(before) 32000 units $500-$250$2.50 $120000$120.000 BE(after)= 40.000 units $5.00-$2.00$3.00 The break-even point will go up 5-6. Gibson Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expend itures related to fixed costs. Its total fixed costs are $1,200,000, but 25 percent of this value is represented by depreciation Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point? Solution: Gibson sons Cash related fixed costs= Total Fixed Costs-Depreciation =$1,200,000-25%($1,200,000 $1,200,000-$300,000 $900,000 $900000 BE 375. units 240 S-165 Copyright o by The McGraw-Hill Companies. In
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-165 5-5. Shawn Penn & Pencil Sets, Inc. has fixed costs of $80,000. Its product currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce variable costs per unit to $2.00. As a result of Bic's suggestion, will the break-even point go up or down? Compute the necessary numbers. Solution: Shawn Penn & Pencil Sets, Inc. 40,000 units $3.00 $120,000 $5.00 $2.00 $120,000 BE (after) 32,000 units $2.50 $80,000 $5.00 $2.50 $80,000 BE (before) = = − = = = − = The break-even point will go up. 5-6. Gibson & Sons, an appliance manufacturer, computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $1,200,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $2.40. How many units does the firm need to sell to reach the cash break-even point? Solution: Gibson & Sons Cash related fixed costs = Total Fixed Costs – Depreciation = $1,200,000 – 25% ($1,200,000) = $1,200,000 – $300,000 = $900,000 375,000 units $2.40 $900,000 BE = =
Draw two break-even graphs--one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits Solution: Labor-Intensive and capital-intensive break-even graphs Labor-Intensive Capital-Intensive Revenue and costs Revenue and costs Total revenue Total revenue Total costs Total costs BE Variable cost Variable cost Fixed costs Units produced and sold Units produced and sold The company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a larger contribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline the reverse will be true Copyright o2005 by The McGranr-Hill Companies, Inc. S-166
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-166 5-7. Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits. Solution: Labor-Intensive and capital-intensive break-even graphs Revenue and costs Revenue and costs Total revenue Total revenue Profits Profits Total costs Total costs Variable cost Variable cost Fixed costs Units produced and sold Units produced and sold BE BE Labor-Intensive Capital-Intensive The company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a larger contribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline, the reverse will be true
The Sosa Company produces baseball gloves. The companys income statement for 2004 is as follows Sosa o Income statement For the Year Ended December 31. 2004 Sales(20,000 gloves at $60 each) $1,200000 Less: Variable costs(20, 000 gloves at 400,000 Fixed costs 600.000 Earnings before interest and taxes (EBIt) 200,000 Interest expense Earnings before taxes(EBT) 120,000 ncome tax expense(30%) Earnings after taxes (EAT) 84.000 Given this income statement, compute the following a. Degree of operating leverage b. Degree of financial leverage c. Degree of combined leverage Solution: Sosa company Q=20,000,P=$60,VC=$20,FC=$600,000,1=$80,000 . DOL Q(P-vC) Q(P-VC)-FC 20000(60-$20) 20.000(60-$20)-$60000 20.00040) 20.000(40)-60000 S-167 Copyright o by The McGraw-Hill Companies. In
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-167 5-8. The Sosa Company produces baseball gloves. The company’s income statement for 2004 is as follows: Sosa Company Income Statement For the Year Ended December 31, 2004 Sales (20,000 gloves at $60 each).......................... $1,200,000 Less: Variable costs (20,000 gloves at $20)......................................................................... 400,000 Fixed costs.......................................................... 600,000 Earnings before interest and taxes (EBIT)............. 200,000 Interest expense ...................................................... 80,000 Earnings before taxes (EBT).................................. 120,000 Income tax expense (30%) ..................................... 36,000 Earnings after taxes (EAT)..................................... $ 84,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. Solution: Sosa Company Q = 20,000, P = $60, VC = $20, FC = $600,000, I = $80,000 ( ) ( ) ( ) ( ) ( ) 20,000 ($40) $600,000 20,000 $40 20,000 $60 $20 $600,000 20 000 $60 $20 Q P VC FC Q P VC a. DOL − = − − − = − − − =
5-8. Continued $800.000 $800.000 =4.00x 800.000-$600.000$200,000 EBIT $200.000 b. DFL EBII-I$200.000-$80.000 $200.000 1.67X $120,000 Q(P-vC) Q(P-VC)-FC-I 20.00060-$20) 2000060-$20)-$6000008000 $200040) $200040)-S680000 800.000 6.67X $120.000 Copyright o2005 by The McGranr-Hill Companies, Inc. S-168
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-168 5-8. Continued 4.00x $200,000 $800,000 $800,000 $600,000 $800,000 = = − = 1.67x $120,000 $200,000 $200,000 $80,000 $200,000 EBIT I EBIT b. DFL = = − = − = ( ) ( ) ( ) ( ) ( ) ( ) 6.67x $120,000 $800,000 $20,000 $40 $680,000 $200,000 $40 20,000 $60 $20 $600,000 $80,000 20,000 $60 $20 Q P VC FC I Q P VC c. DCL = = − = − − − − = − − − − =