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Homework answers / question archive / 1)Use the following information about Rat Race Home Security, Inc
1)Use the following information about Rat Race Home Security, Inc. to answer the questions:
Average selling price per unit $306.
Variable cost per unit $187
Units sold 323
Fixed costs $8,196
Interest expense 15,438
Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 10.0 percent?
(You should calculate the degree of financial leverage first).
(Write the percentage sign in the "units" box).
Round the answer to two decimals
2) Post Card Depot, an large retailer of post cards, orders 4,439,315 post cards per year from its manufacturer. Post Card Depot plans on ordering post card 18 times over the next year. Post Card Depot receives the same number of post cards each time it orders. The carrying cost is $0.13 per post card per year. The ordering cost is $246 per order.
What is the annual total inventory management costs of post card inventory?
(Round the answer to two decimal places).
1). Computation of the percentage change in earnings per share:-
Contribution margin = (Selling price per unit - Variable cost per unit) * Number of units sold
= (306 - 187) * 323
= $119 * 323
= $38,437
EBIT = Contribution margin - Fixed cost
= $38,437 - $8,196
= $30,241
EBT = EBIT - Interest expense
= $30,241 - $15,438
= $14,803
Degree of financial leverage = EBIT / EBT
= $30,241 / $14,803
= 2.04 times
Degree of financial leverage = % change in EPS / % change in operating profit margin
2.04 = % change in EPS / 10%
% change in EPS = 2.04 * 10%
= 20.43%
2). Computation of the annual total inventory management costs of post card inventory:-
Inventory order size in units (Q) = 4,439,315 / 18
= 246,628.61
Annual carrying costs = (Q/2) * Carrying cost per unit
= (246,628.61 / 2) * $0.13
= 123,314.31 * $0.13
= $16,030.86
Annual ordering costs = Number of orders * Ordering cost per order
= 18 * $246
= $4,428
Annual total costs = Annual carrying costs + Annual ordering costs
= $16,030.86 + $4,428
= $20,458.86
