Integrative-Multiple leverage measures Play-More Toys produces inflatable beach

Question

Integrative-Multiple leverage measures Play-More Toys produces inflatable beach balls, selling 450,000 balls per year. Each ball produced has a variable operating cost of $0.84 and sells for $1.03. Fixed operating costs are $26,000. The firm has annual interest charges of $6,500, preferred dividends of $1,800, and a 40% tax rate. Calculate the operating breakeven point in units. Use the degree of operating leverage (DOL) formula to calculate DOL. Use the degree of financial leverage (DFL) formula to calculate DFL. Use the degree of total leverage (DTL) formula to calculate DTL. Compare this to the product of DOL and DFL calculated in parts (b) and (c). The operating breakeven point in units is units. (Round to the nearest integer.)

Explanation / Answer

a) Operating break event point = Fixed cost / Contribution =$26000/($1.3-$0.84) = 56,521.74 units

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