Question

In: Finance

You have received the following projected income statement from an employee of your company: Sales                          

You have received the following projected income statement from an employee of your company:

Sales                                                                              $76,000,000

-Variable costs                                                                       ?

- Fixed costs                                                                           ?

                                                                                       ---------------

EBIT                                                                                       ?   

- Interest                                                                            3,050,000      

                                                                                       ---------------

Profit before tax                                                             17,450,000            

- Tax                                                                                  5,450,000    

                                                                                       ---------------

Net Income                                                                     12,000,000

The employee (UW-Eau Claire grad) is confused on the meaning of variable versus fixed costs and could not finish the statement. I have assured the employee that you will not have any problem finishing this. The Company has a 46% contribution margin.

After completing the income statement, determine the following:

A. The breakeven point in dollars.

B. The DOL based on the above statement.

C. The DFL based on the above statement.

D. The DCL based on the above statement.

E. If sales are down 6% from our expected level, what happens (percentage-wise) to EBIT, Net Income and EPS? Assume we have 250,000 shares.

Solutions

Expert Solution

A. Given Contribution margin = 46%

Step 1 Contribution margin = (sales - variable cost)/Sales

=variable cost = sales -( contribution margin* Sales)

= 76000000-(46%*76000000)=41040000

So variable cost =41040000

Explaination Amount
Sales D 76000000
-Variable costs        From Stept 1 E 41040000
- Fixed costs          (D-C-E) B/f 14460000
EBIT A+B= C 20500000
- Interest B 3050000
Profit before tax A 17450000
-Tax 5450000
Net Income 12000000

Break even point is where the sales will be ables to recover the fixed and variable cost. in other words it is no loss or no profit situation

= Fixed cost/contribution margin

= 14460000/46%=31434782.6$

Break even point sales= 31434782.6$

B. DOL = degree of operation leverage= sales- variable cost/(sales - variable cost- fixed cost)

=76000000-41040000/(76000000-41040000-14460000)=1.705

C. DFL = degree of Finance leverage= EBIT/(EBIT- interest)

=20500000/(20500000-3050000)=1.1748

D. DCL= degree of combined leverage=DOL*DFL or contribution margin/(EBIT- interest)

=1.705*1.1748= 2.003

E.

Amount A Decreased by 6% B Explaination Change in % (B-A)/B
Sales          76,000,000              71,440,000 100-6%=94%
-Variable costs                 41,040,000              38,577,600 100-6%=94%
- Fixed costs                   14,460,000              14,460,000 Remains constant
EBIT          20,500,000              18,402,400 Sales-variable cost-fixed cost -10.23% =(18,402,400-20,500,000)/   20,500,000
- Interest            3,050,000                3,050,000 Remains constant
Profit before tax          17,450,000              15,352,400 EBIT- interest
-Tax            5,450,000                4,794,876 Tax % = 5450000/17450000=31.23% so PBT *31.23%
Net Income          12,000,000              10,557,524 -12.02%= (10,557,524-12,000,000)/12,000,000
EPS for 250000 shares                           48                               42 Net income/no of shares -12.02%= (42-48)/48

So change in EBIT= -10.23%

So change in Net income = -12.02%

So change in EPS= -12.02%

jeff jeffy answered 1 year ago
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