Question

Problem Two: (30%)

“Pilot Pens” has sold 1,000,000 pens in 2017. Each pen was sold at price of $0.33 per pen and had a variable cost equal to $0.15 per pen. Furthermore, the company incurred a total of $80,000 in fixed costs. Pilot Pens has no preferred equity, paid $20,000 for interest and has a tax rate of 40%.

Required: Perform the Breakeven and leverage analysis for Pilot Pens by calculating the below figures for 2017:

- Total Revenues

- Total Variable Cost

- EBIT

- EBT

- Breakeven point (in terms of units and dollars)

- Degree of operating leverage, DOL

- Degree of financial leverage, DFL

- Degree of combined leverage, DCL

(SOLUTION MUST BE ON EXCEL)

Answer 1

1. Total Revenues=Units*sold price=1,000,000*$0.33=$330,000

2. Total variable cost=Units*variable cost=1,000,000*$0.15=$150,000

3. EBIT=Total revenues-Total variable costs-Fixed costs=330,000-150,000-80,000=100,000

4. EBT=EBIT-Interest expenses=100,000-20,000=$80,000

5. Breakeven Points (units)=Fixed costs/(sold price-variable cost)=$80,000/(0.33-0.15)=444,444.44

Breakeven Points (dollars)=Fixed costs/Contribution margin

Contribution margin=(Sale price per unit – Variable costs per unit)/Sale price per unit=(0.33-0.15)/0.33=0.5454

Breakeven Points (dollars)=80,000/0.5454=$146,666.7

6. Degree of operating leverage=(sales – variable costs)/(Sales  – variable costs​-Fixed costs)=(330,000-150,000)/(330,000-150,000-80,000)=1.80

7. Degree of Financial leverage=EBIT/EBT=100,000/80,000=1.25

8. Degree of Combined Leverage=Degree of Operating Leverage*Degree of Financial leverage=1.80*1.25=2.25