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Calculate the firm degree of operating leverage

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Question - The SWU Company produces a single type of environmentally friendly shopping bag that can be sold at a constant price of $1.50 per bag. Variable cost per bag is $0.90 (regardless of the production volume), and fixed costs amount to $180,000 per year. The firm pays a tax rate of 30%. The company's assets, valued at $625,000, are financed by 40% debt and 60% equity, with the latter in the form of 20,000 ordinary shares (no preference shares are issued). The firm pays annual interest of 8% on its debt financing.

(i) Calculate the annual operating break-even level (volume) of bag sales.

(ii) Calculate the firm's earnings before interest and taxes (EBIT) and earnings per share (EPS) at annual sales volumes of 350,000, 400,000 and 450,000 bags.

(iii) Calculate the firm's degree of operating leverage (DOL), degree of financial leverage (DFL) and degree of total leverage (DTL) at an annual volume of sales of 400,000 bags.

(iv) State in words the meaning of total leverage.

Reference no: EM132999794

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