80 PART 2: The Springer Company sells its product for $20 per unit. Its fixed co

Question

80 PART 2: The Springer Company sells its product for $20 per unit. Its fixed costs are $10,000 and the variable cost per unit is $10. 1-5 (a) Determine the break-even point in units and dollars. Determine the earnings before interest and taxes at sales of 1,500 units. What is the new break-even point if the price per unit increases from $20 to $30? (b) (c) (d) Determine the degree of operating leverage at sales of 2,000 and 4000 units, respectively 6 The Savannah Company has 10,000 shares of common stock outstanding with a par value of $40, and its tax rate is 48 percent. The Savannah Company is weighing the choice among three financing alternatives for a major expansion program which would require $100,000 and increase its operating profit from $90,000 to $125,000. The financing alternatives to raise the needed $100,000 are as follows: 8 8 (a) 2,000 common shares at $50 net to the company. (b) $100,000 of 7 percent preferred stock 0

Explanation / Answer

Ans) Springer Company Selling Price=(A) $          20.00 Variable cost=(B) $          10.00 Contribution Margin=(A)-(B ) $          10.00 Fixed Cost manufacturing $ 10,000.00 a) Breakeven point in Units=(Fixed Cost/Contribution Margin Per Unit) Breakeven point in Units=($10000/$10) 1000 Breakeven Point in dollars=(Fixed Cost/Contributiion Margin ratio Contribution Margin Ratiio=Contribution Margin Per Unit/Sales Per Unit Contribution Margin Ratiio=($10/$20)*100 50% Breakeven point in dollars=($10000/50%)      20,000.00 b) Sales (Units) 1500 Selling Price=(A) $          20.00 Variable cost=(B) $          10.00 Contribution Margin=(A)-(B ) $          10.00 Fixed Cost manufacturing $ 10,000.00 Sales(1500*$20) $ 30,000.00 Variable Cost=(1500*$10) $ 15,000.00 Contribution Margin=($30000-$15000) $ 15,000.00 Less: Fixed cost $ 10,000.00 Net Income before Interest & Taxes $    5,000.00 C) Selling Price=(A) $          30.00 Variable cost=(B) $          10.00 Contribution Margin=(A)-(B ) $          20.00 Fixed Cost manufacturing $ 10,000.00 Breakeven point in Units=(Fixed Cost/Contribution Margin Per Unit) Breakeven point in Units=($10000/$20) 500 Breakeven Point in dollars=(Fixed Cost/Contributiion Margin ratio Contribution Margin Ratiio=Contribution Margin Per Unit/Sales Per Unit Contribution Margin Ratiio=($20/30)*100 67% Breakeven point in dollars=($10000/67%)      15,000.00 d) Sales (Units) 2000 4000 Selling Price=(A) $          20.00 20 Variable cost=(B) $          10.00 10 Contribution Margin=(A)-(B ) $          10.00 10 Fixed Cost manufacturing $ 10,000.00 10000 Sales $ 40,000.00 $ 80,000.00 Variable Cost $ 20,000.00 $ 40,000.00 Contribution Margin $ 20,000.00 $ 40,000.00 Less: Fixed cost $ 10,000.00 $ 10,000.00 Net Income before Interest & Taxes $ 10,000.00 $ 30,000.00 Operating Leaverage=(Increase in Earning Before Tax/EBIT)/(Increase in Sales/Sales) Operating Leaverage=(20000/10000)/(2000/2000) $             2.00 Increase in Earnings before interest & Tax=($30000-$10000) $ 20,000.00 Increase in sales=(4000-2000) 2000

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