Public Administration - Municipal ACC106 Chapter Notes - Chapter 5: Operating Leverage, Earnings Before Interest And Taxes

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greenmuskrat329

3 Dec 2017

School

Seneca College

Department

Public Administration - Municipal

Course

Public Administration - Municipal ACC106

Professor

Riggs

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Document Summary

P= . 00; vc = . 40 per unit; be = 20,000 units. Measures the amount of fixed operating costs used by a firm. Dol measures the sensitivity of a firm"s operating income. Percent change in unit volume (24,000/36000) = 66. 67% = (20,000/80,000) = 25% Percent change in unit volume (20,000/80,000) = 25% A in sales a larger in operating income (or ebit) if. Dol measures the sensitivity of a firm"s operating income to. (dol) measures the sensitivity of changes in ebit to changes in sales. If dol is 1. 5, and sales go up by 10%, ebit will go up by. Only companies that use fixed costs in the production process will experience operating leverage. A leveraged firm has high fixed costs, a high be point and high dol. low dol. A non-leveraged firm has low fixed costs, a low be point and.

Related Questions

1. A highly automated plant would generally have

all fixed costs

more fixed than variable costs

all variable costs

more variable than fixed costs

2. If the price per unit decreases because of competition but the cost structure remains the same

the breakeven point rises

the degree of combined leverage declines

the degree of financial leverage declines

all of these.

3 If a firm has fixed costs of $31,000, a price of $9.50, and a breakeven point of 15,500 units, the variable cost per unit is:

$8.50

$7.50

$6.00

$9.50

4. Davison Toaster Corp. sells its products for $250 per unit. It has the following costs:

Rent	$109,900
Factory labor	$29 per unit
Executive salaries	$290,000
Raw materials	$6 per unit

The break-even point is

1,210 units

not enough information has been provided to determine the break-even point.

less than 1,710 units

more than 1,210 units

5. A low DOL means:

there is low debt.

there are high overhead costs.

there is a large amount of equity.

there are low fixed costs.

6. Breakeven analysis

is useful to know how much changes in volume affect cost and profit.

short-term profitability.

does not include depreciation expense as a fixed cost when calculating the degree of financial leverage.

all of these.

7. Combined leverage is concerned with the relationship between

changes in EBIT and changes in net income.

changes in volume and changes in EBIT.

changes in volume and changes in EPS.

changes in EBIT and changes in EPS.

ceruleanbuffalo933

Integrativelong dashâMultiple leverage measuresâââ Play-More Toys produces inflatable beachâ balls, selling 400,000 balls per year. Each ball produced has a variable operating cost of $0.89 and sells for $1.23. Fixed operating costs are $26,000. The firm has annual interest charges of $6,400â, preferred dividends of $1,900â, and a 40% tax rate.

a. Calculate the operating breakeven point in units.

b. Use the degree of operating leverageâ (DOL) formula to calculate DOL.

c. Use the degree of financial leverageâ (DFL) formula to calculate DFL.

d. Use the degree of total leverageâ (DTL) formula to calculate DTL. Compare this to the product of DOL and DFL calculated in parts â(bâ) and â(câ).

rubyeagle632

McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65 (Variable cost / Sales). The firm has a $30 million, 10 percent bank loan. McGeeâs marginal tax rate is 40 percent. Sales are expected to be $80 million.

a. Compute McGeeâs degree of operating leverage at an $80 million sales level. Explain the result.

Sales = ??
VC = Variable Cost = ??
FC = Fixed Cost = ??
EBIT = Sales â VC â FC = ??
DOL = (Sales â VC) / EBIT = ??
Explain ??

b. Compute McGeeâs degree of financial leverage at an $80 million sales level. Explain the result.

EBIT = ??
Interest = ??
DFL = EBIT / (EBIT â Interest) = ??
Explain ??

c. Compute MCGreeâs degree of combined leverage. Explain the result.

DCL = DOL * DFL = ??

Explain ??

d. If sales decline to $76 million, forecast McGeeâs earnings per share.

chocolatewildebeest901

Public Administration - Municipal ACC106 Chapter Notes - Chapter 5: Operating Leverage, Earnings Before Interest And Taxes

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