Cullum Creations produces hand warmers, selling 400,000 warmers a year. Each war

Question

Cullum Creations produces hand warmers, selling 400,000 warmers a year. Each warmer produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6,000, preferred dividends of $2,000, and a 40% tax rate.

a.       Calculate the operating breakeven point in units

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

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

d.      Use the degree of total leverage (DTL) formula to calculate DTL.

Explanation / Answer

a. Calculate the operating breakeven point in units. ============================================================================================================================== Break-even point = Fixed cost/unit contribution margin ============================================================================================================================== Unit contribution margin = selling price per unit - variable cost per unit = $1 - 0.84 = $0.16 ============================================================================================================================== Breakeven point = 28,000/ 0.16 = 175,000 balls ============================================================================================================================== b. Use the degree of operating leverage (DOL) formula to calculate DOL. ============================================================================================================================== DOL = Q(SP -VC) [Q(SP - VC) - FC] ============================================================================================================================== At 400,000 balls ============================================================================================================================== DOL = 400,000 (1

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