Financial Management Essay

1549 words - 7 pages

LEVERAGE

Problem: 1

The McGwire co. produces baseball gloves. The company's income Statement for the year 2011 is as follows:

McGwire Company

Income Statement

For the year ended December31, 2011

|Sales (20,000 gloves at $60 each) |$1,200,000.00 |
|Less: Variable Costs ( 20,000 gloves at $20 each) |$400,000.00 |
|Contribution ( 20,000 gloves at $40 each) |$800,000.00 |
|Less: Fixed Costs ...view middle of the document...

67 Times

Requirement "c":

Degree of Combined Leverage (DCL)

DCL = DOL X DFL

DCL = 4 X 1.67

= 6.68 Times

Requirement "d":

Break-even Point in Units, & BEP in Dollar

a. BEP in Units = Operating Fixed Cost

Contribution per Unit

= $600,000

$40

= 15000 Units

b. BEP in Dollar = BEP Units X Sales per Unit

= 15000 units X $60 per unit

= $ 900,000

LEVERAGE

Problem: 2

The Following Information’s are available from the book of Shohag CO.

|Sales in units |90,000 |
|Sales price per units |15 |
|Variable Costs per unit |10 |
|Annual Fixed Operating Cost |130,000 |
|15% Debenture |250,000 |
|Share Capital of $100 per Share |200,000 |
|Proposed Increase in Sales |40% |
|Assume Tax Rate |25% |

|Calculate and Show the Effect of : |
|a. Degree of Operating Leverage (DOL) |
|b. Degree of Financial Leverage (DFL) |
|c. Degree of Combined Leverage (DCL) |
|d. Show the effect of Leverage. |

Solution:2

|Shohag Co. |
|Income Statement |
|For the year ended December31, 2011 ...

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