Part 1: (6 marks) Porter Productions sells video tapes for S15.00 each. Their va
ID: 2807688 • Letter: P
Question
Part 1: (6 marks) Porter Productions sells video tapes for S15.00 each. Their variable cost per unit is $9.00. In addition, they incur S180,000.00 in fixed costs each year a. What is the Porter's annual breakeven point in sales revenue? (2 marks) b. How many units will Porter have to produce and sell in order to generate an operating income (revenues minus expenses) of S54,000? (2 marks) c. At 40,000 units of sales, what is the degree of operating leverage (DOL)? (2 marks) Part 2: (14 marks) Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 40% The company is considering issuing $4250,000 worth of bonds carrying a 9% coupon rate and using the proceeds to repurchase stock. Bonds will be issued at par. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 0.90. However, the CFO believes the beta would rise to 1.10 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? Should Monroe proceed with its plan? ExplainExplanation / Answer
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Break-even point is the level of sales that a company must achieve to reach at no profit no loss situation,
The formula to calculate BEP (in units) = Total Fixed cost/(selling price per unit - variable cost per unit)
Where,
Fixed cost = $180000
Selling price = 15 per unit
Variable cost = 9 per unit
Let's put all the values in the formula to get the BEP in units,
BEP = 180000/ (15 - 9)
BEP = 180000/6
BEP = 30000 Units
So to reach the BEP company must sell 30000 units
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Break-even point in $ can be calculated by multiplying BEP in units with sale price per unit
BEP in $ = BEP units * sales price per unit
BEP in $ = 30000 * 15
BEP in $ = 450000
So BEP in $ is 450000
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Sale required to achieve desired profit = (Fixed cost + Desired profit)/ (Sales price per unit - Variable cost per unit)
Where,
Fixed cost = $180000
Selling price = $15
Variable cost = $9
Desired profit = $54000
Let's put all the values in the formula,
Required sale = (180000 + 54000)/ (15 - 9)
= 234000/ 6
= 39000
So to reach desired profit of $54000 required units that must be sold is 39000 units
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Degree of operating leverage = (Sales – Variable cost)/(sales – VC – FC)
= (600000 – 360000)/(600000 – 360000 – 180000)
= 240000/60000
= 4
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Hope that helps.
Feel free to comment if you need further assistance J