Answer 1,

To compute the degree of operating leverage (DOL), degree of financial leverage (DFL), degree of
combined leverage (DCL), and the break-even point, we'll need some additional information.
Specifically, we need the contribution margin and the fixed costs.

The contribution margin is the difference between sales revenue and variable costs, per unit. In this
case, the contribution margin per fan is $20 - $8 = $12.

The fixed costs are given as $44,000.

With this information, we can calculate the required values:

a. Degree of Operating Leverage (DOL):

The degree of operating leverage (DOL) measures the sensitivity of the company's earnings before
interest and taxes (EBIT) to changes in sales. It is calculated as the percentage change in EBIT divided by
the percentage change in sales.

DOL = (Contribution Margin × Sales) / EBIT

DOL = ($12 × 7,000) / $40,000

DOL = 1.75

b. Degree of Financial Leverage (DFL):

The degree of financial leverage (DFL) measures the sensitivity of the company's earnings before taxes
(EBT) to changes in EBIT. It is calculated as the percentage change in EBT divided by the percentage
change in EBIT.

DFL = EBIT / (EBIT - Interest)

DFL = $40,000 / ($40,000 - $10,000)

DFL = 1.33

c. Degree of Combined Leverage (DCL):

The degree of combined leverage (DCL) measures the sensitivity of the company's earnings after taxes
(EAT) to changes in sales. It is calculated as the product of the DOL and DFL.

DCL = DOL × DFL

DCL = 1.75 × 1.33

DCL = 2.32
d. Break-even Point:

The break-even point is the level of sales at which the company's earnings before taxes (EBT) are zero. It
can be calculated using the following formula:

Break-even Point (in units) = Fixed Costs / Contribution Margin per unit

Break-even Point (in units) = $44,000 / $12

Break-even Point (in units) = 3,666.67

Therefore, the break-even point is approximately 3,667 fans.

Please note that these calculations assume a constant sales mix and do not consider other factors such
as price changes, cost variations, or economies of scale.

To solve these problems, we'll need to use some basic financial formulas. Let's go through each question
step by step.

Answer 2,

a) The break-even point is the quantity at which the total revenue equals the total cost, resulting in
zero profit or loss. In this case, the fixed costs are $80,000, and the variable cost per box is $10. The
selling price per box is $15.

Let's denote the break-even point as "Q" (in boxes). To calculate it, we'll set up the equation:

Revenue = Cost

Selling price per box * Q = Fixed costs + Variable cost per box * Q

$15 * Q = $80,000 + $10 * Q

Simplifying the equation:

$15Q - $10Q = $80,000

$5Q = $80,000

Q = $80,000 / $5

Q = 16,000 boxes

Therefore, the break-even point is 16,000 boxes.

b) To calculate the profit or loss on a specific quantity of boxes, we need to compare the total revenue
with the total cost.

 For 15,000 boxes:

Total revenue = Selling price per box * Quantity = $15 * 15,000 = $225,000

Total cost = Fixed costs + Variable cost per box * Quantity = $80,000 + $10 * 15,000 = $230,000

Profit/Loss = Total revenue - Total cost = $225,000 - $230,000 = -$5,000 (a loss of $5,000)

 For 30,000 boxes:

Total revenue = Selling price per box * Quantity = $15 * 30,000 = $450,000

Total cost = Fixed costs + Variable cost per box * Quantity = $80,000 + $10 * 30,000 = $380,000

Profit/Loss = Total revenue - Total cost = $450,000 - $380,000 = $70,000 (a profit of $70,000)

C) The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to
changes in sales. It is calculated using the following formula:

DOL = Contribution margin / Operating income

Contribution margin = Selling price per box - Variable cost per box

 At 20,000 boxes:

Contribution margin = $15 - $10 = $5

Operating income = Total revenue - Total cost = $15 * 20,000 - ($80,000 + $10 * 20,000) = $100,000

DOL = $5 / $100,000 = 0.05

 At 30,000 boxes:

Contribution margin = $15 - $10 = $5

Operating income = Total revenue - Total cost = $15 * 30,000 - ($80,000 + $10 * 30,000) = $150,000

DOL = $5 / $150,000 = 0.0333

The degree of operating leverage decreases as the quantity sold increases because fixed costs form a
smaller proportion of the total cost as sales increase. As fixed costs become a smaller factor, changes in
sales have a lesser impact on operating income.
D). The degree of financial leverage (DFL) measures the sensitivity of a company's earnings per share
(EPS) to changes in operating income. It is calculated using the following formula:

DFL = Operating income / Earnings before interest and taxes (EBIT)

 At 20,000 boxes:

Operating income = $100,000 (from previous calculation)

EBIT = Operating income + Interest expense = $100,000 + $10,000 = $110,000

DFL = $100,000 / $110,000 = 0.9091

 At 30,000 boxes:

Operating income = $150,000 (from previous calculation)

EBIT = Operating income + Interest expense = $150,000 + $10,000 = $160,000

DFL = $150,000 / $160,000 = 0.9375

E ) .The degree of combined leverage (DCL) combines the degree of operating leverage (DOL) and the
degree of financial leverage (DFL). It is calculated as the product of DOL and DFL:

DCL = DOL * DFL

 At 20,000 boxes:

DOL = 0.05 (from previous calculation)

DFL = 0.9091 (from previous calculation)

DCL = 0.05 * 0.9091 = 0.0455

 At 30,000 boxes:

DOL = 0.0333 (from previous calculation)

DFL = 0.9375 (from previous calculation)

DCL = 0.0333 * 0.9375 = 0.0312

Answer 3,

a. To compute earnings per share (EPS), we need to calculate the net income first. Net income is
calculated by subtracting interest expense and taxes from earnings before interest and taxes (EBIT).

 For Cain:

Interest expense = Debt * Interest rate = $50,000 * 0.10 = $5,000

Tax rate = 30%

 For EBIT = $10,000:

Net income = EBIT - Interest expense - Taxes = $10,000 - $5,000 - ($10,000 - $5,000) * 0.30 = $7,000

EPS = Net income / Common shares = $7,000 / 10,000 = $0.70

 For EBIT = $15,000:

Net income = EBIT - Interest expense - Taxes = $15,000 - $5,000 - ($15,000 - $5,000) * 0.30 = $10,000

EPS = Net income / Common shares = $10,000 / 10,000 = $1.00

 For EBIT = $50,000:

Net income = EBIT - Interest expense - Taxes = $50,000 - $5,000 - ($50,000 - $5,000) * 0.30 = $35,000

EPS = Net income / Common shares = $35,000 / 10,000 = $3.50

 For Able:

Interest expense = Debt * Interest rate = $100,000 * 0.10 = $10,000

Tax rate = 30%

 For EBIT = $10,000:

Net income = EBIT - Interest expense - Taxes = $10,000 - $10,000 - ($10,000 - $10,000) * 0.30 = $0

EPS = Net income / Common shares = $0 / 5,000 = $0.00

 For EBIT = $15,000:

Net income = EBIT - Interest expense - Taxes = $15,000 - $10,000 - ($15,000 - $10,000) * 0.30 = $2,000

EPS = Net income / Common shares = $2,000 / 5,000 = $0.40

  For EBIT = $50,000:

Net income = EBIT - Interest expense - Taxes = $50,000 - $10,000 - ($50,000 - $10,000) * 0.30 = $24,000

EPS = Net income / Common shares = $24,000 / 5,000 = $4.80

b) The relationship between earnings per share (EPS) and the level of EBIT is that as EBIT increases, the
EPS generally increases. This relationship occurs because as EBIT increases, there is a higher amount of
earnings available to be distributed to shareholders after deducting interest expense and taxes. Thus,
the EPS, which represents the earnings allocated to each outstanding share, tends to increase with
higher EBIT levels.

c) If the cost of debt increased to 12 percent, the interest expense would change accordingly. Let's
calculate the new interest expense:

 For Cain:

New interest expense = Debt * New interest rate = $50,000 * 0.12 = $6,000

 For Able:

New interest expense = Debt * New interest rate = $100,000 * 0.12 = $12,000

To calculate the break-even level for EBIT, we need to find the EBIT at which the net income becomes
zero. With the updated interest expense, the break-even EBIT can be found as follows:

 For Cain:

Break-even EBIT = Interest expense / (1 - Tax rate) = $6,000 / (1 - 0.30) = $6,000 / 0.70 = $8,571.43

 For Able:

Break-even EBIT = Interest expense / (1 - Tax rate) = $12,000 / (1 - 0.30) = $12,000 / 0.70 = $17,142.86

Therefore, the break-even level for EBIT would be approximately $8,571.43 for Cain and $17,142.86 for
Able if the cost of debt increased to 12 percent, assuming all other factors remain equal.

To calculate the degree of combined leverage (DCL), we need to first calculate the degree of operating
leverage (DOL) and the degree of financial leverage (DFL), and then multiply them together.

The degree of operating leverage (DOL) can be calculated using the following formula:

DOL = Contribution margin / Operating income

The contribution margin is calculated as the difference between the selling price per unit and the
variable cost per unit:

Contribution margin = Selling price per unit - Variable cost per unit
In this case:

Selling price per unit = $25

Variable cost per unit = $5

Contribution margin = $25 - $5 = $20

The operating income can be calculated as the difference between the total revenue and total costs:

Total revenue = Selling price per unit * Sales volume = $25 * 125,000 = $3,125,000

Total costs = Fixed costs + Variable costs = $1,800,000 + ($5 * 125,000) = $2,425,000

Operating income = Total revenue - Total costs = $3,125,000 - $2,425,000 = $700,000

DOL = $20 / $700,000 = 0.000028571

The degree of financial leverage (DFL) can be calculated using the following formula:

DFL = Operating income / Earnings before interest and taxes (EBIT)

In this case: Operating income = $700,000

EBIT = Operating income + Interest expense = $700,000 + $400,000 = $1,100,000

DFL = $700,000 / $1,100,000 = 0.636363636

Finally, the degree of combined leverage (DCL) is calculated by multiplying the DOL and DFL:

DCL = DOL * DFL = 0.000028571 * 0.636363636 = 0.000018182

Therefore, the degree of combined leverage for the Mitaka Company is approximately 0.000018182.