Quantitative Problems

Full Answer Section

• 50% Sales Decrease:

50% Decrease = 30,000 chargers * 50% = 15,000 chargers New Sales = 30,000 chargers - 15,000 chargers = 15,000 chargers New EBIT = (15,000 chargers * $20/charger) - ($10/charger * 15,000 chargers) - $100,000 = $50,000 Percent Change in EBIT = (($50,000 - $200,000) / $200,000) * 100% = 75% decrease

D. Degree of Operating Leverage (DOL):

DOL = (Contribution Margin / EBIT) DOL = ((Price - Variable Cost) / EBIT) DOL = (($20/charger - $10/charger) / $200,000) = 1.5

Interpretation: A DOL of 1.5 indicates that a 1% change in sales will lead to a 1.5% change in EBIT. This means QuickCharge Corporation has high operating leverage, making it more sensitive to changes in sales volume. High operating leverage can be risky as small changes in sales can significantly impact profits.

StayDry Umbrella Corporation Analysis:

A. EPS and DFL (Zero Debt):

• Normal Rain:

EPS = (EBIT - Interest) / Outstanding Shares EPS = ($100,000 - 0) / 50,000 shares = $2.00 per share

• Drought:

EPS = ($50,000 - 0) / 50,000 shares = $1.00 per share

• DFL:

DFL = (Change in EBIT) / (Change in Sales) DFL = (($100,000 - $50,000) / ($50,000 - $0)) = 2.0

Interpretation: A DFL of 2.0 indicates that a 1% change in sales will lead to a 2% change in EBIT. This means StayDry has high financial leverage, further amplifying the effect of sales changes on profitability.

B. EPS and DFL (with Debt):

• New EBIT (Normal Rain):

Interest Expense = Debt * Interest Rate = $300,000 * 10% = $30,000 New EBIT = $100,000 - $30,000 = $70,000

• New EBIT (Drought):

New EBIT = $50,000 - $30,000 = $20,000

• New EPS (Normal Rain):

EPS = ($70,000 - 0) / 25,000 shares = **

Sample Solution

QuickCharge Corporation Analysis:

A. EBIT:

EBIT = Revenue - (Variable Costs + Fixed Costs) EBIT = (30,000 chargers * $20/charger) - ($10/charger * 30,000 chargers) - $100,000 EBIT = $600,000 - $300,000 - $100,000 = $200,000

B. Breakeven Point:

Breakeven Point = Fixed Costs / (Price - Variable Cost) Breakeven Point = $100,000 / ($20/charger - $10/charger) = 5,000 chargers

C. EBIT with Sales Changes:

• 50% Sales Increase:

50% Increase = 30,000 chargers * 50% = 15,000 chargers New Sales = 30,000 chargers + 15,000 chargers = 45,000 chargers New EBIT = (45,000 chargers * $20/charger) - ($10/charger * 45,000 chargers) - $100,000 = $350,000 Percent Change in EBIT = (($350,000 - $200,000) / $200,000) * 100% = 75% increase