Question

A firm’s product sells for $12 per unit and the unit variable cost is $8. The operating fixed costs total $100,000 per year. The firm pays $20,000 interest and $3,000 preferred dividends each year. The tax rate = 40%.

1. What is the firm’s operating breakeven point (rounded to the whole unit)?

2. What is the DFL at 50,000 units per year (rounded to the first decimal place)?

3. What is the DOL at 50,000 units per year (rounded to the first decimal place)?

4. What is the DTL at 70,000 units per year (rounded to the first decimal place)?

Answer 1

1. Firm's Operating break even point

Contribution per unit = Selling price per unit- variable cost per unit

Contribution per unit = $12-$8

Contribution per unit =$4

2.Degree of Financial Leverage at 50,000 units per year

Units	50000
Sales Price	$600,000
Less: Variable cost	$400,000
Contribution (f)	$200,000
Less: Fixed Cost	$100,000
EBIT	$100,000
Less: Interest	$20,000
EBT	$80,000

(Rounded up)

3.Degree of Operating Leverage at 50,000 units per year

Units	50000
Sales Price	$600,000
Less: Variable cost	$400,000
Contribution (f)	$200,000
Less: Fixed Cost	$100,000
EBIT	$100,000
Less: Interest	$20,000
EBT	$80,000

4. Degree of Total (Combined) Leverage at 70,000 units per year

Units	70000
Sales Price	$840,000
Less: Variable cost	$560,000
Contribution (f)	$280,000
Less: Fixed Cost	$100,000
EBIT	$180,000
Less: Interest	$20,000
EBT	$160,000

(Rounded up)

I hope this clear your doubt.

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