N UMERICAL P ROBLEMS
| 4.1|
EBIT, Operating BEP
The following relationship exists for National Soap Company, a manufacture of superior quality soaps.
Each unit of output is sold for Rs.45 the fixed costs are Rs.175,000; and variable costs are Rs.20 per unit.
a.
What is the firms gain or loss at sales of 5,000 units?
b. What is the break-even point?
| 4.2|
Operating BEP
A company estimates that its fixed operating costs are Rs. 500,000, and its variable costs are Rs 3.00 per unit
sold. Each unit produced sells for Rs. 4.00. What is the company's breakeven point? In other words, how
many units must it sell before its operating income becomes positive?
| 4.3|
Operating BEP
Aquarium suppliers, Inc., produces 10-gallon aquariums. The firm's variable costs equal 40 percent of
rupee sales, while fixed costs total Rs. 150,000. The firm plans sell the aquarium for Rs. 10 each.
a.
What is Aquarium suppliers' breakeven quantity of sales?
b. What is Aquarium suppliers' breakeven sales volume?
c.
What price must Aquarium Suppliers charge to breakeven at sales of 40,000 units?
| 4.4|
Operating BEP, EBIT
The Himalayan Company manufactures a line of ladies watches hat is sold through discount house. Each
watch is sold for Rs. 25; the fixed costs are Rs.140,000 for 30,000 watches or less; variable costs are Rs.15 per
watch.
a.
What is the firm's gain or loss at sale of 8,000 watches? Of 18,000 watches?
b. What is the operating breakeven point? Illustrate by mean of a chart.
c.
What is Weaver's degree of operating leverage at sales of 8,000 units? Of 18,000 units?
d.. What happens to the operating breakeven point if the selling price rises to Rs.31? What is the
significance of the change to the financial manager?
e.
What happens to the operating breakeven point if the selling price rises to Rs.31 but variable costs
rise to Rs. 23 a unit.
| 4.5|
Operating BEP, EBIT
The following relationship exist for Balaju Industries a manufacturer of electronic components. Each unit
of output is sold for Rs.45; the fixed costs are Rs.175,000, of which Rs.110,000 are annual deprecation
charges; variable costs are Rs.20 per unit.
a.
What is the firm's gain or loss at sales of 5,000 units? Of 12,000 units?
b.
What is the operating income breakeven point?
c.
What is the cash breakeven point?
d. Assume Balaju is operating at a level of 4,000 units. Are creditors likely to seek the liquidation of
the company if it is slow in paying its bills?
| 4.6|
Operating BEP
Bob's Bikes Inc. (BBI) manufactures biotech sunglasses. The variable material cost is Rs-0.74 per unit and
the variable labor cost is Rs.2.61 per unit.
a.
What is the variable cost per unit?
b.
Suppose BBI incurs fixed costs of Rs. 610,000 during a year in which total production is 300,000 units.
What are the total costs for the year?
c.
If the selling price is Rs.7.00 per unit, does BBI break even on a cash basis? If depreciation is
Rs.150,000 per year, what is the accounting break-even point?
| 4.7|
Operating BEP, Cash BEP
The following price and cost data are given for firms M, N, and O:
M
Rs. 25
Rs. 10
Rs. 30,000
Selling price per unit
Variable cost per unit
Fixed operating costs
N
Rs. 12
Rs. 6
Rs. 24,000
O
Rs.15
Rs.5
Rs. 100,000
Calculate (a) the break-even point for each firm, and (b) the cash break-even point for each firm,
assuming Rs. 5,000 of each firm's fixed costs are depreciation, (c) Rank these firms in terms of their risk.
| 4.8|
Operating BEP, Desired profit, Cash BEP
Ayam Books is planning to market a book entitled 'Financial Management’ in Nepal. The marketing in
charge has suggested that it can be sold at Rs. 65 per piece. It is estimated that the annual fixed operating
costs, including Rs 70,000 depreciation, will be Rs. 200,000 and the variable cost per book will be Rs 57
a.
What minimum number of books should the company sell to attain operating breakeven?
b. What minimum number of books should the company sell to attain cash break even?
c What should be the sales volume (in units and rupees) to achieve after tax profit of Rs. 100,000?
d. What should be the sales volume (in units and rupees) to achieve after tax profit of Rs. 200,000?
Assume 25 percent corporate tax rate.
| 4.9|
EBIT, BEP, DOL
The Laxmi Corporation produces teakettle, which it sells for Rs.15 each. Fixed costs are Rs.700,000 for up
to 400,000 units of output. Variable costs are Rs.10 per kettle.
a.
What is the firm's gain or loss at sales of 125,000 units? Of 175,000 units?
b. What is the breakeven point? Illustrate by means of a chart.
c.
What is Laxmi degree of operating leverage at sales of 125,000 units? Of 50,000 units? Of 175,000
units?
| 4.10|
Operating BEP, DOL, EBIT
The following information provided for Firm A and B.
Firm
Selling price per unit
Variable cost per unit
Fixed operating costs
a.
b.
c.
| 4.11|
A
Rs.8
Rs. 4.8
Rs. 80,000
B
Rs.8
Rs.4
Rs. 120,000
Determine the break-even point for each firm.
Which firm has the higher operating leverage at any given level of sales. Explain.
At what level of sales in units, do both firms earn the same operating profit?
DOL, DFL, DCL, Operating BEP, Cash BEP, Financial BEP
You are supplied with the following analytical income statement for your firm. It reflects last year's
operations.
Particulars
Sales (100,000 units)
Variable cost
Revenue before fixed cost
Fixed cost (including Rs 500,000 annual depreciation)
EBIT
Interest expenses
EBT
Taxes
Amount (Rs)
Rs 18,000,000
7,000,000
11,000,000
6,000,000
5,000,000
1,750,000
Rs 3,250,000
1,250,000
Net income
a.
b.
c.
d.
e.
f.
g.
| 4.12|
Rs 2,000,000
At this level of output, what is the degree of operating leverage?
What is the degree of financial leverage?
What is the degree of combined leverage?
If sales should increase by 15 percent, by what percent would earnings before taxes (and net
income) increase?
What is the firm's break-even point in units and sales rupees?
What is the firm's cash break-even point in units and sales rupees?
What is the financial break-even point for the firm?
DOL, DFL, DCL, Operating BEP
You have developed the following analytical income statement
represents the most recent year's operations, which ended yesterday.
Particulars
Sales
Variable cost
Revenue before fixed cost
Fixed cost
EBIT
Interest expenses
EBT
Taxes (50%)
Net income
for
your corporation. It
Amount (Rs)
Rs 20,000,000
12,000,000
8,000,000
5,000,000
3,000,000
1,000,000
Rs 2,000,000
1,000,000
Rs 1,000,000
Your supervisor in the controller's office has just handed you a memorandum that asking for written
responses to the following questions:
a.
At this level of output, what is the degree of operating leverage?
b. What is the degree of financial leverage?
c.
What is the degree of combined leverage?
d. What is the firm's break-even point in sales rupees?
e.
If sales should increase by 20 percent, by what percent would earnings before taxes (and net
income) increase?
| 4.13|
DOL, DFL, DCL
Everest Company 2014 income statement is shown below.
Income Statement of Everest Company for December 31, 2014
(Thousand of rupees)
Particulars
Sales
Cost of goods sold
Gross profit
Fixed opening costs
Earnings before interest and taxes
Interest
Earning before taxed
Taxes (40%)
Net income
Dividends (50%)
a.
b.
Amount (Rs)
Rs.36,000
(25,200)
Rs.10,800
(6,480)
Rs.4,320
(2,880)
Rs.1440
(576)
Rs.864
Rs.432
Compute the degree of operating leverage (DLO), degree of financial leverage (DFL), and degree of
total leverage (DTI for Everest company.
Interpret the meaning of each of the numerical values you computed in part a.
c.
| 4.14|
Briefly discuss some ways Everest can reduce its degree of total leverage.
DFL, Financial BEP
Bardiya Timber Corporation has the following partial income statement for 2014.
Particulars
Earning before interest and taxes
Interest
1Earning before taxes
Taxes (40%)
Not Income
Number of common shares
a.
b.
c.
4.15|
If Bardiya's has no preferred stock, what is its financial breakeven point? Show the amount you
come up with actually is the financial breakeven by recreating the portion of the income statement
shown above for that amount.
What is the degree of financial leverage for Bardia's at EBIT equal to Rs.4,500? What does this value
mean?
If Bardia's actually has preferred stock that requires payment of dividends equal to Rs.600, what
would be the financial break-even point? Show the amount you compute is the financial breakeven
by
recreating
the
portion
of
the
income
statement
shown above for that amount.
EBIT, Operating BEP, Financial BEP, DOL, DFL, DCL
Jumla apple Company manufactures golf balls. The following income statement information is relevant
for Jumla apple in 2014.
Particulars
Selling price per sleeve of balls (P)
Variable cost of goods sold (% of price, P)
Fixed operating costs
Interest expense
Preferred dividends
Marginal tax rate
Number of common shares
a.
b.
c
d.
| 4.16|
Amount (Rs)
Rs.4,500
(2,000)
Rs.2,500
(1.000)
Rs.1.500
1,000
Amount (Rs)
Rs. 5.00
75%
Rs. 50,000
Rs. 10,000
Rs. 0.00
40%
20,000
What level of sales dose Jumla apple need to achieve in 2014 to breakeven with respect to operating
income?
At its operating break-even, what will be the EPS for Straight Arrow?
How many sleeves of golf balls (units) does Straight Arrow need to sell in 1996 to attain the
financial breakeven points?
If Jumla apple expects its sales to be Rs.300,000 in 1996, what is its degree of operating leverage, its
degree of financial leverage and its degree of total (combine) leverage? Based on the degree of total
leverage, compute the earnings per share you would expect in 2014 if sales actually turn out to be
Rs.270.000.
DOL, DFL, DCL
You are given the following information about the Sanima Company, which manufactures small ball
pens:
Price = Rs.35; Variable costs = Rs.19 per unit; Fixed costs = Rs.200,000;
Debt (B) = Rs.300,000; Interest rate = 12%; Tax rate = 40%
In 2009, Sanima's net income was Rs.600,000.
a.
How many ball pens were sold in 2009?
b. Calculate the degrees of operating, financial, and combined leverage for Sanima.
c.
Suppose that Sanima restructures its balance sheet, increasing debt to Rs.l million. Prepare a pro
forma income statement and calculate the degree of the combined leverage assuming the same level
of sales calculated in Part a.
| 4.17|
Operating BEP, Desired Profit
Annapurna Publishing Company expects to earn Rs. 210,000 next year after taxes. Sales be Rs. 4 million.
Selling price per unit is Rs. 200 and a variable cost per unit of Rs. 150 per unit. The tax rate is 30 percent.
a.
What are the firm's fixed costs expected to be next year?
b. Calculate the firm's break-even point in both units and rupees.
c.
If the firm require an after tax profit of Rs 250,000, what is the target unit and
rupees of sales required?