MB 2203 FINANCIAL MANAGEMENT

TUTORIAL WEEK 12A

1. Breakeven analysis Barry Carter is considering opening a music store. He wants to

estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98
each, variable operating costs are $10.48 per CD, and annual fixed operating costs are
$73,500.
a. Find the operating breakeven point in number of CDs.
b. Calculate the total operating costs at the breakeven volume found in part a.
c. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go
into the music business?
d. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month
noted in part c?

2. Integrative—Multiple leverage measures and prediction Carolina Fastener, Inc., makes

a patented marine bulkhead latch that wholesales for $6.00. Each latch has variable
operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays
$13,000 interest and preferred dividends of $7,000 per year. At this point, the firm is
selling 30,000 latches per year and is taxed at a rate of 40%.
a. On the basis of the firm’s current sales of 30,000 units per year and its interest and
preferred dividend costs, calculate its EBIT and earnings available for common stock
holder.
b. calculate the firm’s degree of operating leverage (DOL).
c. Calculate the firm’s degree of financial leverage (DFL).
d. Calculate the firm’s degree of total leverage (DTL).
e. Carolina Fastener has entered into a contract to produce and sell an additional 15,000
latches in the coming year. Use the DOL, DFL, and DTL to predict and calculate the
changes in EBIT and earnings available for common. Check your work by a simple
calculation of Carolina Fastener’s EBIT and earnings available for common, using the
basic information given.