Chapter 12 Determining the Financing Mix

40) Welker Products sells small kitchen gadgets for $15 each. The gadgets have a variable cost of $4 per unit, and Welker Products' fixed operating costs are $220,000 per year. Welker Products' capital structure includes 55% debt and 45% equity. Annual interest expense is $25,000, and the corporate tax rate is 35%.

a. Calculate the break-even point in units.

b. If Welker Products sells 25,000 units, calculate the firm's EBIT and net income.

c. If sales increase ten percent from 25,000 units to 30,000 units, estimate the firm's expected EBIT and net income.

d. Does Kelly Products use operating leverage and/or financial leverage? Explain.

41) ABC Corp. has estimated the following income statement for its next fiscal year.

Sales	$20,000,000
Variable costs	6,000,000
Revenue before fixed costs	14,000,000
Fixed costs	9,000,000
EBIT	5,000,000
Interest expense	900,000
Earnings before taxes	4,100,000
Taxes (35%)	1,435,000
Net income	$2,665,000

a. What is the break-even point in sales dollars for the firm?

b. If the average unit cost is $20, what is the break even point in units?

42) Techno Robots produces a functioning toy robot. At a production and sales level of 10,000 robots, the firm has the following information:

Selling price per unit = $15

Variable costs per unit = $8

EBIT = $17,500

a. What is the break-even point in units for the firm?

43) Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order bicycles this year. Variable costs are 40 percent of sales while fixed costs total $600,000. At what price must each bicycle be sold for Wheely to earn EBIT of $450,000?

44) JKE, Inc. has a break even sales level of $10,000,000 and has fixed costs of $4,000,000 per year. The selling price per unit is $200. What is the variable cost per unit?

45) DXZ, Inc. currently produces one product which sells for $250 per unit. The company's fixed costs are $75,000 per year; variable costs are $205 per unit. A salesman has offered to sell the company a new piece of equipment which will increase fixed costs to $100,000. The salesman claims that the company's break-even point will not be altered if the company purchases this equipment. What will be the company's new variable cost per unit?

46) Stan's Cans, Inc. expects to earn $150,000 next year after taxes on sales of $2,200,000. Stan's manufactures only one size of garbage can. Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece. Stan's tax rate is currently 34%.

a. What are the firm's expected fixed costs for next year?

b. What is the break-even point in units?

47) The Western Boot Company will produce 94,000 pairs of boots next year. Variable costs are 35 percent of sales, while fixed costs total $223,000. At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?

48) The Knight Corporation projects that next year its fixed costs will total $240,000. Its only product sells for $34 per unit, of which $18 is a variable cost. The management of Knight is considering the purchase of a new machine that will lower the variable cost per unit to $14. The new machine, however, will add to fixed costs through an increase in depreciation expense. How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?

Learning Objective 3

1) Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.