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Mo & Chris's Delicious Burgers, Inc., sells food to Military Cafeterias for $29 a box. The fixed costs of this operation are $132,000, while the variable cost per box is $17.

(a)

What is the break-even point in boxes?

Break-even point boxes

(b)

Calculate the profit or loss on 14,000 boxes and on 29,500 boxes. (Input all amounts as positive values. Omit the "$" sign in your response.)

Boxes Profit/Loss Amount
14,000 (Click to select)LossProfit $
29,500 (Click to select)LossProfit $

(c)

What is the degree of operating leverage at 13,000 boxes and at 29,500 boxes? (Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of
operating leverage
13,000
29,500

(d)

If the firm has an annual interest expense of $10,700, calculate the degree of financial leverage at both 13,000 and 29,500 boxes.(Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of
financial leverage
13,000
29,500

(e)

What is the degree of combined leverage at both sales levels? (Enter only numeric value rounded to 2 decimal places.)

Boxes Degree of
combined leverage
13,000
29,500

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Nestor Rutherford
Nestor RutherfordLv2
28 Sep 2019

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The Harding Company manufactures skates. The company's income statement for 2010 is as follows:
HARDING COMPANY
Income Statement
For the Year Ended December 31, 2010
Sales (11,200 skates @ $74 each) $ 828,800
Less: Variable costs (11,200 skates at $32) 358,400
Fixed costs 270,000
Earnings before interest and taxes (EBIT) 200,400
Interest expense 66,000
Earnings before taxes (EBT) 134,400
Income tax expense (40%) 53,760
Earnings after taxes (EAT) $ 80,640
(a)

Compute the degree of operating leverage. (Enter only numeric value rounded to 2 decimal places.)

Degree of operating leverage
(b)

Compute the degree of financial leverage. (Enter only numeric value rounded to 2 decimal places.)
Degree of financial leverage
(c)

Compute the degree of combined leverage. (Enter only numeric value rounded to 2 decimal places.)
Degree of combined leverage
(d)

Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.)
Break-even point skates

Problem 5-13 Break-even point and degree of leverage [LO5-2, 5-5]

United Snack Company sells 50-pound bags of peanuts to university dormitories for $44 a bag. The fixed costs of this operation are $381,250, while the variable costs of peanuts are $.27 per pound.

a. What is the break-even point in bags?

b. Calculate the profit or loss (EBIT) on 11,000 bags and on 24,000 bags.
c. What is the degree of operating leverage at 19,000 bags and at 24,000 bags? (Round your answers to 2 decimal places.)

d. If United Snack Company has an annual interest expense of $27,000, calculate the degree of financial leverage at both 19,000 and 24,000 bags. (Round your answers to 2 decimal places.

e. What is the degree of combined leverage at both a sales level of 19,000 bags and 24,000 bags? (Round your answers to 2 decimal places.)


PLEASE SHOW YOUR WORK. PLEASE LIST YOUR ANSWERS ON THE LEFT HAND SIDE. SOMETIMES FILES ARE POSTED TO BIG AND ARE UNABLE TO SEE WORK AND ANSWERS. I WAS ASKED FOR A CASE STUDY, AFER REVIEW, THERE ISN'T ONE. THIS IS ALL THE INFOR THAT IS GIVEN FOR THE PROBLEM. THANK YOU.

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.3 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $5.1 million. In five years, the aftertax value of the land will be $5.5 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.84 million to build. The following market data on DEI’s securities is current:

Debt: 228,000 7.2 percent coupon bonds outstanding, 25 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 8,600,000 shares outstanding, selling for $70.80 per share; the beta is 1.1.

Preferred stock: 448,000 shares of 5 percent preferred stock outstanding, selling for $80.80 per share and and having a par value of $100.

Market: 7 percent expected market risk premium; 5 percent risk-free rate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 8 percent on new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 35 percent. The project requires $1,250,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.

a. Calculate the project’s initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars.)

Solve: Cash Flow $

b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Solve: Discount Rate (percentage)

c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $4.3 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars.)

Solve: for aftertax salvage value $

d. The company will incur $6,600,000 in annual fixed costs. The plan is to manufacture 16,000 RDSs per year and sell them at $10,700 per machine; the variable production costs are $9,300 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars.)

Solve: Operating Cash Flow $

e. DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your final answer to the nearest whole number.)

Solve: Break-even Quantity (units)

f. Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. Assume that the net working capital will not require flotation costs. (Enter your NPV answer in dollars, not millions of dollars (e.g., 1,234,567). Enter your IRR answer as a percent. Do not round intermediate calculations and round your final answers to 2 decimal places.)

Solve: IRR (percentage)

NPV (dollars)

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