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During the most recent fiscal year, Medical Electronics Corporation sold 2,560,000 health monitoring devises at $60...

During the most recent fiscal year, Medical Electronics Corporation sold 2,560,000 health monitoring devises at $60 per unit. Variable operating costs were 60% of sales ($36 per unit), while fixed operating costs were $12,288,000. The cost of outstanding debt (interest expense) was $4,152,000. Medical Electronics Corporation’s tax rate is 30%. The company does not sell any other product. (PLEASE SHOW YOUR WORK).

a) Construct Medical Electronics Corporation’s income statement for the most recent fiscal year (complete the following table).

Sales

     Less: Variable operating costs

               Fixed operating costs

Earnings before interest and taxes (EBIT)

     Less: Interest expense

Earnings before taxes (EBT)

     Less taxes (30%)

Earnings after taxes (EAT)

b) Compute the degree of financial leverage (DFL)

c) Interpret the calculated DFL.

d) Compute the Operating Break-even point in dollars.

e) Compute the Operating Break-even point in units.

Solutions

Expert Solution

a $
Sales          153,600,000
     Less: Variable operating costs            92,160,000
Contribution            61,440,000
     Fixed operating costs            12,288,000
Earnings before interest and taxes (EBIT)            49,152,000
     Less: Interest expense               4,152,000
Earnings before taxes (EBT)            45,000,000
     Less taxes (30%)            13,500,000
Earnings after taxes (EAT)            31,500,000
b Degree of financial leverage (DFL)
EBIT / EBT
49152000 / 45000000                         1.09
c DFL is More than 1 so it is interpreted as A high degree of financial leverage indicates that even a small change in the company’s leverage may result in a significant fluctuation in the company’s profitability
d Contribution Margin
Contribution / Sales *100 40%
     Fixed operating costs 12288000
Contribution Margin(Fixed Cost / Contribution Margin)            30,720,000
e Break-even point in units
     Fixed operating costs            12,288,000
Contribution Per Unit(60 -36) 24
Break-even point in units                  512,000

jeff jeffy answered 2 months ago
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