Question 1. Hazardous Toys Co. produces boomerangs that sell for $8 each and have a variable cost of $7.50. Fixed costs are $15,000.
(a) compute the break even point in units.
(b) Find the sales (in units) needed to earn a profit of $25,000.
Question 2. Sean Penn and Pencil Co. has fixed costs of $80,000. Its products currently sells for $5 per unit and has variable costs of $2.50 per unit. Mr. Bic the head of manufacturing , proposes to buy new equipment that will cost $400,000 and drive up fixed costs to $120,000. Although the price will remain at $5 per unit, the increased automation will reduce costs per unit to $2. As a result of Bic's suggestion, will the break even point go up or down. Compute the necessary numbers.
Question 3. Draw two break even graphs - one for a conservative firm using labor intensive production and another for a capital intensive firm. assuming these companies compete within the sam industry and have identical sales, explain the impact of changes in sales volume on both firm's profits.
Question 4. The Sosa Company produces baseball gloves. The company's income statement for 2004 is as follows:
Sales (20,000 gloves at $60 each) 1,200,000
Less: variable costs (20,000 gloves at $20) 400,000
Fixed costs 600,000
________
Earnings before interest 200,000
Interest expenses 80,000
_________
Earnings before taxes 120,000
Income tax expenses (30%) 36,000
__________
Earning after taxes 84,000
(a) What is the degree of operating leverage?
(b) What is the degree of financial leverage?
(c) What is the degree of combined leverage?
Question 5. Thompson Wood Co. has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.
Question 6. Nicholas Birdcage Co. ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one and half days. Furthermore, the cash management department of his bank has indicated that he can defer his payments on his accounts by one and half day without affecting suppliers. The bank has a remote distribution center.
(a) In the company has $4 million per day in collections and $2 million per day in disbursements, how many dollars will the cash management system free up?
(b) In the company can earn 9% per annum on freed up funds, how much will the income be?
(c) If the total cost of the system is $700,000, should it be implemented?