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Question - You are the newly appointed financial manager of Business Like This (Pty) Ltd that sells gas bottles. The company wants to increase its sales by 2,000 units for the next financial year.
Gas bottles are sold at R500 per unit with a variable cost of R250 per unit.
The fixed cost is R100,000 and will not change should the number of units sold increase as planned.
The tax rate is 30%.
You have the following information at your disposal: The company has 20,000 issued ordinary shares.
2021
2022 (Projected)
Sales (units)
3,000
5,000
R
Revenue
1,500,000
2,500,000
Variable cost
(750,000)
(1,250,000)
Fixed cost
(100,000)
EBIT
650,000
1,150,000
Interest expense
(50,000)
Net profit before tax
600,000
1,100,000
Taxation (30%)
(180,000)
(330,000)
Earnings available to ordinary shareholders
420,000
770,000
Required -
1. Calculate the break-even units for the year 2021 and explain what this means.
2. Calculate the earnings per share for 2021 and the projected earnings per share for 2022.
3. Calculate the degree of financial leverage (DFL).
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