A company is trying to decide on their use of operating and financial leverage f

Question

A company is trying to decide on their use of operating and financial leverage from among four choices. They can sell their product for $5 per unit. Their Interest Expense is the Interest Rate times Debt. Their Tax Rate is 40%

Fixed Costs      Variable Costs Debt Interest Rate    Equity

26. How many units must the firm sell in order to have an EBIT of $200,000 under option 1?

a. 50,000        b. 100,000      c. 150,000      d. 200,000

27. What is their Degree of Operating Leverage under option 2 if they sell 80,000 units?

a. 1.23                        b. 1.56                        c. 1.82                        d. 2.25   

28. What is their Degree of Combined leverage under option 4 if they have Sales of $300,000?

a. 1.25                        b. 1.67                        c. 2.33                        d. 2.71   

29. Their current Sales under option 3 is $200,000. If Sales increase by 10%, then Net Income will increase by how much?

a. 10%                        b. 20%                        c. 25%                        d. 33%

Explanation / Answer

26) b. 100,000
27)c. 1.82   
28) a. 1.25
29) c. 25%

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