Carolina Fastener, Inc., makes a patented marine bulkhead latch that wholesales
ID: 2772904 • Letter: C
Question
Carolina Fastener, Inc., makes a patented marine bulkhead latch that wholesales for $6.18. Each latch has variable operating costs of $3.44. Fixed operating costs are $49,600.00 per year. The firm pays $12,300 interest and preferred dividends of $6,000 per year. At this point, the firm is selling $32,000 latches per year and is taxed at a rate of 40%.
Calculate Carolina Fastener’s operating breakeven point.
On the basis of the firm’s current sales of 32,000 units per year and its interest and preferred dividend costs, calculate its EBIT and earnings available for common stockholders. (EACS)
Calculate the earnings available for common below
EBIT -----?
Less: Interest expense ---?
EBT---- ?
Less: taxes (40%) --------?
Net profits -------?
Preferred stock dividend ---------?
EACS -------?
Calculate the firm’s degree of operating leverage (DOL).
Calculate the firm’s degree of financial leverage (DFL).
Calculate the firm’s degree of total leverage (DTL).
Carolina Fastener has entered into a contract to produce and sell an additional 15,700 latches in the coming year. Use the DOL, DFL, and DTL to predict and calculate the changes in EBIT and earnings available for common. Check your work by a simple calculation of Carolina Fastener’s EBIT and earnings available for common, using the basic information given
Carolina Fastener has entered into a contract to produce and sell an additional 15,700 latches in the coming year; the percentage change in sales will be --------?
The estimate new EBIT will be ----------?
The estimated new EBIT will be ______?
The percentage change in earnings available for common stockholders will be ----------?
The new earnings available for common stockholders will be __________?
Check your work by a simple calculation of Carolina fasterner’s EBIT available for common, using the basic information given the EBIT will be ---------?
Calculate the earnings available for common below __________?
Explanation / Answer
As per the rule, I can do first four parts only.
Contribution per unit = Sales price – variable cost per unit
= 6.18 – 3.44
=2.74
Total contribution (2.74 x 32000) 87,680
(-) fixed cost -49600
EBIT 38,080
(-) Interest expense -12,300
EBT 25,780
(-) taxes 25780x40% -10,312
Net Income 15,468
(-) preferred dividend -6000
EACS 9,468
Degree of operating leverage = total contribution/ ebit
= 87,680/ 38,080
= 2.30
Degree of financial leverage =ebit/ EBT
= 38,080/ 25,780
= 1.48
Degree of combined leverage = Degree of operating leverage x Degree of financial leverage
= 2.30x1.48
= 3.404
-