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Homework answers / question archive / 7A1: The Poseidon Swim Company produces swim trunks
7A1:
The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $38.77. The variable cost per unit is $24.60, Poseidon Swim has average fixed costs per year of $51,085.
What is the break-even point in units for Poseidon Swim?
7B1:
Irresistible Chips is reviewing its financial condition. The firm generated an operating profit of $5,598,564. The firm's interest expense was $2,174,195.
What is the firm's degree of financial leverage? Round the answer to two decimals
7C1:
La Cucaracha Pest Control, Inc. is reviewing its financial condition. The firm's operating leverage is 2.25. The firm's financial leverage was of 2.88. What is the firm's degree of combined (total) leverage of La Cucaracha Pest Control, Inc. ?
7D1:
Leaf It To Us Corporation is considering an expansion project. The necessary equipment could be purchased for $13,398,474 and shipping and installation costs are another $26,001. The project will also require an initial $153,589 investment in net working capital. What is the project's initial investment outlay?
Round the answer to the whole $.
7E1:
Genetic Insights Co. purchases an asset for $17,738. This asset qualifies as a seven-year recovery asset under MACRS. The seven-year fixed depreciation percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. Genetic Insights has a tax rate of 30%. The asset is sold at the end of six years for $3,722.
Calculate accumulated depreciation over 6 years. Round the answer to two decimals.
7A1: Computation of Break-even Point in units for Poseidon Swim:
Break-even Point = Total Fixed Cost/(Selling Price - Variable Cost per Unit)
= 51085/(38.77- 24.60)
= 51085/14.17
= 3,605.15 or 3,605 units
7B1: Computation of Firm's Degree of Financial Leverage:
Degree of Financial Leverage = EBIT / (EBIT - Interest expense)
= $5,598,564 / ($5,598,564 - $2,174,195)
= 1.63
7C1: Computation of Firm's Degree of Combined (total) Leverage of La Cucaracha Pest Control, Inc.:
Degree of combined leverage=Operating leverage*Financial leverage
= 2.25*2.88
= 6.48
7D1: Computation of Project's Initial Investment Outlay:
Project's Initial Investment Outlay = Purchase Cost + Installation Cost + NWC
= 13398474 + 26001 + 153589
= $13,578,064
7E1: Computation of Accumulated Depreciation over 6 Years:
Accumulated Depreciation over 6 Years =$17,738*(0.1429 +0.2449 + 0.1749 +0.1249 + 0.0893 + 0.0893)
= $15,364.66
