Question

BWP projects sales of 100000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and fixed costs will be $2.4 million. BWP has $1 million in bonds outstanding, on which it pays 7%, and its marginal tax rate is 38%. There are 100000 shares of stock outstanding which trade at their book value of $30. Compute BWP's contribution, contribution margin, net income, DOL, and EPS. Round the answers to two decimal places. Enter your net income answer in whole dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2.

Contribution per unit	$
Contribution Margin	%
Net Income	$
DOL
EPS	$

Answer 1

Contribution Per unit=Sales price per unit -variable cost per unit

Sales price per unit =$50 variable cost are 40% of the revenue that is 40% of 100000*50=$5,000,000 that is 40% of $5,000,000 =$2,000,000/100000=$20

Contribution per unit =$50-$20=$30

Contribution Margin =Sales -variable Cost

Sales revenue=$50*100,000=$5,000,000 Variable costs=$2,000,000

Contribution margin =$5,000,000-$2,000,000=$3,000,000

Contribution Margin %(contribution margin ratio)=Contribution Margin/Sales =$3,000,000/$5,000,000=.6 or 60% OR Unit CM/Unit selling price =$30/$50=60%

Net Income =Sales -Variable cost Less fixed Cost which Gives EBIT(Operating income ) Less interest Less Tax

Sales =$5,000,000 Variable costs =$2,000,000 Less fixed Costs =$2,400,000 EBIT=$600,000 Less Interest(1,000,000*7%)=$70,000 Earnings Before Tax = $530,000 Less tax @38%=$42,400 Net income =$487,600

Degree of Operating leverage (DOL)=Contribution margin/EBIT

Contribution margin =$3,000,000 EBIT=$600,000 Degree of operating leverage =$3,000,000/$600,000=5

EPS =Net Income /No:of shares Outstanding =$487,600/100,000=$4.876 per share