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pogonyaev
3 years ago
14

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

Business
1 answer:
Sedbober [7]3 years ago
4 0

Answer:

a. The break-even point for operating expenses before and after expansion

break even point before expansion = fixed costs + variable costs

fixed costs = $2,030,000

variable costs = $3,650,000

break even point = $2,030,000 + $3,650,000 = $5,680,000

break even point after expansion = = fixed costs + variable costs

fixed costs = $2,530,000

variable costs = $8,300,000 x 50% = $4,150,000

break even point = $2,530,000 + $4,150,000 = $6,680,000

b. The degree of operating leverage before and after expansion.

degree of operating leverage before expansion = (sales - variable costs) / (sales - variable costs - fixed costs)

sales = $7,300,000

variable costs = $3,650,000

fixed costs = $2,030,000

DOL = ($7,300,000 - $3,650,000) / ($7,300,000 - $5,680,000) = $3,650,000 / $1,620,000 = 2.25

degree of operating leverage after expansion = (sales - variable costs) / (sales - variable costs - fixed costs)

sales = $8,300,000

variable costs = $4,150,000

fixed costs = $2,530,000

DOL = ($8,300,000 - $4,150,000) / ($8,300,000 - $6,680,000) = $4,150,000 / $1,620,000 = 2.56

c-1. The degree of financial leverage before expansion.

DFL = EBIT / (EBIT - interest expense)

EBIT before expansion = $1,620,000

Interest expense = $660,000

DFL = $1,620,000 / ($1,620,000 - $660,000) = 1.69

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.3 million for this question.

EBIT after option A = $1,620,000

Interest expense after option A = $660,000 + ($4,300,000 x 13%) = $1,219,000

DFL (option A) = $1,620,000 / ($1,620,000 - $1,219,000) = 4.04

EBIT after option B = $1,620,000

Interest expense after option A = $660,000

DFL (option B) = $1,620,000 / ($1,620,000 - $660,000) = 1.69

EBIT after option C = $1,620,000

Interest expense after option A = $660,000 + ($2,150,000 x 12%) = $918,000

DFL (option C) = $1,620,000 / ($1,620,000 - $918,000) = 2.31

d. Compute EPS under all three methods of financing the expansion at $8.3 million in sales (first year) and $10.1 million in sales (last year).

first year:

EBIT after option A = $1,620,000

Interest expense after option A = $1,219,000

Pre tax income = $401,000

Income tax (40%) = $160,400

Net income = $240,600

EPS = $240,600 / 430,000 stocks = $0.56

EBIT after option B = $1,620,000

Interest expense after option A = $660,000

Pre tax income = $960,000

Income tax (40%) = $384,000

Net income = $576,000

EPS = $576,000 / 602,000 stocks = $0.96

EBIT after option C = $1,620,000

Interest expense after option A = $918,000

Pre tax income = $702,000

Income tax (40%) = $280,800

Net income = $421,200

EPS = $421,200 / 483,750 stocks = $0.87

last year:

EBIT after option A = $2,520,000

Interest expense after option A = $1,219,000

Pre tax income = $1,301,000

Income tax (40%) = $520,400

Net income = $780,600

EPS = $780,600 / 430,000 stocks = $1.82

EBIT after option B = $2,520,000

Interest expense after option A = $660,000

Pre tax income = $1,860,000

Income tax (40%) = $744,000

Net income = $1,116,000

EPS = $1,116,000 / 602,000 stocks = $1.85

EBIT after option C = $2,520,000

Interest expense after option A = $918,000

Pre tax income = $1,602,000

Income tax (40%) = $640,800

Net income = $961,200

EPS = $961,200 / 483,750 stocks = $1.99

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