Quantitative Problems

Full Answer Section

• • Percent change in EBIT = ($350,000 - $200,000) / $200,000 * 100% = 75% increase
• 50% decrease in sales (15,000 chargers):
  • New sales = 15,000 chargers * $20/charger = $300,000
  • New EBIT = $300,000 - $150,000 - $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 / Sales) / (EBIT / Sales) Contribution margin = Price - Variable cost = $20 - $10 = $10 DOL = ($10 / $600,000) / ($200,000 / $600,000) = 1.5

Interpretation of DOL: QuickCharge has a DOL of 1.5, meaning that a 1% change in sales will lead to a 1.5% change in EBIT. This indicates a high degree of operating leverage, making the company more sensitive to fluctuations in sales. This means that even small changes in sales can have a significant impact on the company's profitability, increasing the business risk.

StayDry Umbrella Corporation Calculations:

A. EPS and DFL without debt:

• Normal rain EPS = EBIT / Outstanding shares = $100,000 / 50,000 shares = $2.00/share
• Drought EPS = $50,000 / 50,000 shares = $1.00/share
• DFL = (EBIT change from 1% sales change) / (EPS change from 1% sales change)
• DFL = [(1%*EBIT)/EBIT] / [(1%*EPS)/EPS] = EBIT / EPS
• DFL (normal rain) = $100,000 / $2.00/share = 50
• DFL (drought) = $50,000 / $1.00/share = 50

B. EPS and DFL with debt:

• Interest expense = $300,000 * 10% = $30,000
• New EBIT (normal rain) = $100,000 - $30,000 = $70,000
• New EBIT (drought) = $50,000 - $30,000 = $20,000
• New EPS (normal rain) = $70,000 / 25,000 shares = $2.80/share
• New EPS (drought) = $20,000 / 25,000 shares = $0.80/share
• New DFL (normal rain) = $70,000 / $2.80/share = 25

Sample Solution

A. EBIT:

Sales = 30,000 chargers * $20/charger = $600,000 Variable costs = 30,000 chargers * $10/charger = $300,000 EBIT = Sales - Variable costs - Fixed costs EBIT = $600,000 - $300,000 - $100,000 = $200,000

B. Breakeven Point:

Breakeven point = Fixed costs / (Price - Variable cost) Breakeven point = $100,000 / ($20 - $10) = 10,000 chargers

C. EBIT changes with different sales:

• 50% increase in sales (45,000 chargers):
  • New sales = 45,000 chargers * $20/charger = $900,000
  • New EBIT = $900,000 - $450,000 - $100,000 = $350,000