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Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Their fixed operating costs...

  1. Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Their fixed operating costs are $100,000 and their variable operating costs are $10 per charger. Currently they are selling 30,000 chargers per year.
    1. What is QuickCharge’s EBIT (earnings before interest and taxes) at current sales of 30,000?
    2. What is QuickCharge’s breakeven point?
    3. Calculate the EBIT if QuickCharge’s sales increase 50% to 45,000 chargers. What is the percent of change in EBIT under this increase in sales? Also, calculate the EBIT if the company's sales decrease 50% to 15,000 chargers. What is the percent of change in EBIT under this decrease in sales?
    4. What is QuickCharge’s degree of operating leverage? Based on your computation, what does its operating leverage say about QuickCharge’s business risk?

Solutions

Expert Solution

Solution:-

A. To Calculate Quick Charge's EBIT-

EBIT = Sales - Variable Cost - Fixed Cost

EBIT = 30,000 * $20 - 30,000 * $10 - $1,00,000

EBIT = $6,00,000 - $3,00,000 - $1,00,000

EBIT = $2,00,000

B. To Calculate Quick Charge's Break Even Point (BEP)-

BEP =

BEP =

BEP = 10,000 Units

C. To Calculate the EBIT if QuickCharge’s sales increase 50% to 45,000 chargers-

EBIT = Sales - Variable Cost - Fixed Cost

EBIT = 45,000 * $20 - 45,000 * $10 - $1,00,000

EBIT = $9,00,000 - $4,50,000 - $1,00,000

EBIT = $3,50,000

Percent of change in EBIT under this increase in sales-

% Change =

% Change = 75%

To Calculate the EBIT if QuickCharge’s sales decreases 50% to 15,000 chargers-

EBIT = Sales - Variable Cost - Fixed Cost

EBIT = 15,000 * $20 - 15,000 * $10 - $1,00,000

EBIT = $3,00,000 - $1,50,000 - $1,00,000

EBIT = $50,000

Percent of change in EBIT under this decrease in sales-

% Change =

% Change = -75%

D. QuickCharge’s degree of operating leverage and what does its operating leverage say about QuickCharge’s business risk-

DOL =

DOL =

DOL = 1.50

DOL =

DOL =

DOL = 1.50

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jeff jeffy answered 1 year ago
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