Suppose QuickCharge Corporation manufactures phone chargers. They sell their cha

Question

Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Their fixed operating costs are $100,000 and their variable operating costs are $10 per charger. Currently they are selling 30,000 chargers per year.

A) What is QuickCharge’s EBIT (earnings before interest and taxes) at current sales of 30,000?

B) What is QuickCharge’s breakeven point?

C) Calculate the EBIT if QuickCharge’s sales increase 50% to 45,000 chargers. What is the percent of change in EBIT under this increase in sales? Also, calculate the EBIT if the company's sales decrease 50% to 15,000 chargers. What is the percent of change in EBIT under this decrease in sales?

D) What is QuickCharge’s degree of operating leverage? Based on your computation, what does its operating leverage say about QuickCharge’s business risk?

Explanation / Answer

1)

EBIT = Sales - Variable cost - Fixed cost

EBIT = 30000*20 - 30000*10 - 100000 = 200000

2)

Breakeven point = Fixed cost / (Price - Variable cost)

Breakeven point = 100000 / (20 - 10) = 10000

3)

EBIT = 45000*20 - 45000*10 - 100000 = 350000

% change = (350000 - 200000) / 200000 = 75%

EBIT = 15000*20 - 15000*10 - 100000 = 50000

% change = (50000 - 200000) / 200000 = -75%

4)

DOL = % change in EBIT / % change in sales

DOL = 75% / 50% = 1.5

DOL = (Sales - Variable cost) / ( Sales- Variable cost - Fixed cost )

   = (30000*20 - 30000*10) / (30000*20 - 30000*10 - 100000) = 1.5

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.