Carjack Inc. sells iPhone chargers. It has variable cost of $5 per item. Fixed c
ID: 2710091 • Letter: C
Question
Carjack Inc. sells iPhone chargers. It has variable cost of $5 per item. Fixed costs are $500/week. It sells iPhone charger for $20. It estimates to sell 3,000 chargers per year. a) Calculate Carjack's total annual revenue b) Calculate Carjack's total annual cost c) Calculate Caijack's breakeven unit sales d) Calculate EBIT e) What is the operating income, at the breakeven sales level f) Calculate DOL for 10% change in sales g) If Carjack has $1,000 interest payment on debt, what is DFL h) What is Carjack's DCL? i) If sales increase by 20%, how much net income increases?Explanation / Answer
a) Carjack's Total Annual Revenue = 3,000 X $ 20 = 60000 $ b) Carjack's Total Annual Costs = 3,000 X $5 (Variable) + $ 500 X 52 (Fixed) = 41000 $ c) For breakeven unit sales, Costs = Sales Hence, sale value is 41,000 $, and at a selling price of $ 20 per charger, it works out to 2,050 chargers. d) EBIT for Carjack = $ 60,000 - $ 41,000 = 19000 $ e) Operating Income at Breakeven sales level is 0 f) DOL = % Change in Margin / % Change in Sales Therefore, with a 10% increase in sales, the margin levels go up by $ 2 or $2/15 = 13% Hence, DOL= 13%/10% = 1.3 g) With an interest of $ 1,000 on debt, the DFL for Carjack is DFL = Margin/Margin-Interest 1.05 h) DCL = Degree of Combined Leverage which is a combination of DOL and DFL Therefore, DCL = 1.3 X 1.05 = 1.37 i) If sales quantity increased by 20% then the revised quantity will be 3,600 At this level, the margin of income woud be Sales 72000 $ COGS 44000 $ Income before taxes 28000