?LEVERAGE AND CAPITAL STRUCTURE
UBS Ltd makes latches that sell for $6.00. Each latch has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13,000 interest and preference dividends of $7,000 per year. Tax rate is 30%.
- a) Calculate the operating break-even point.
- b) Based on the firm?s current sales of 40,000 units per year and its interest and preference dividend costs, calculate its EBIT and net profit available for ordinary shareholders.
- c) Calculate the DOL and explain what the result means.
- d) Calculate the DFL and explain what the result means.
Contribution Margin =
2.5 Fixed Cost = 50000 Break Even Point (in units) =
= Fixed Cost / Contribution Margin
50000 / 2.5
20000 Break Even Point (revenue) =
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