Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the produc

Question

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

The variable costs for Sinclair are $16 per unit compared to $10 per unit for Boswell.

a. If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.)
  

b. If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.)
  

c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? (Round your answer to the nearest whole percent.)

Sinclair Boswell Capital Structure Debt @ 11% $ 1,980,000 0 Common stock, $10 per share 1,320,000 $ 3,300,000 Total $ 3,300,000 $ 3,300,000 Common shares 132,000 330,000 Operating Plan: Sales (73,000 units at $20 each) $ 1,460,000 $ 1,460,000 Variable costs 1,168,000 730,000 Fixed costs 0 323,000 Earnings before interest and taxes (EBIT) $ 292,000 $ 407,000

Explanation / Answer

a.

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b.

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c.  
The degree of Combined Leverage tells us about what percentage will EPS change due to sales.
As in situation b, Degrees of combined leverage is calculated as 1, it means EPS will change by same percantage as change in sales.

This means that if sales double in part b, then EPS will also double.

Combining Sinclairs Capital Structure with Boswell Operating Plan Note : This means we take business data from Boswell while capital structure from Sinclairs Sales 1460000 Less Variable Costs 730000 Contribution 730000 Less Fixed Costs 323000 EBIT 407000 Less Interest 217800 EBT 189200

Now degree of Combined Leverage = Contribution / EBT
= 730000 / 189200
= 3.8583 (Ans)

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