Question

question 1

Part Three - Problems. Answer Three out of Four Problems Play-More Toys produces inflatable beach balls, selling 400,000 balls per year. Each Dan produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6.000, and a 40% tax rate. Now calculate one following: a. Operating Break-Even point in units b. Decree of Operating Leverage (DOL) c. Degree of Financial Leverage (DFL) d. Degree of Combined Leverage (DCL) e. Also compare DCL to the product of DOL and DCL calculated in parts b and c Show Your Calculation:

Answer 1

	Computation Of Contribution Margin
		=Sales Price - Variable Operating Cost
		=$1 -$0.84
		=$0.16 per unit
	a)	Operating Break Even Point
			= Fixed Assets / Contribution Margin Per Unit
			=$28000/0.16
			=175000 Units
	b)	Degree Of Operating Leverage
			Contribution Margin =0.16*400000 =$64000				64000
	DOL	=Contribution Margin/ EBIT
			=64000/(64000-28000)
			=64000/36000
		DOL=	1.78
	c)	Degree Of Financial Leverage
		= EBIT / (EBIT- Interest)
		=36000/(36000-6000)
		=36000/30000
	DFL	=1.2
	d)	Dregree Of Combined Leverage
		= Contribution/EBI
		=64000/30000
	DCL	=2.13
	f)	Comparing DCL to product of DOLand DFL
		=1.78 * 1.2
		=2.13
	DCL is equal to product of DFL and DOL