Define the degree of operating leverage

Assignment Help Financial Management

Reference no: EM132002186

Red Hot, Inc manufactures outdoor cooking stove. The average selling price for the various units is $600. The associated variable cost is $400 per unit. Fixed costs for the firm average is $200,000 annually. Company has $1,000,000 debt paying 12% interest.

A) How many stoves should the firm produce and sell in order to break-even? what is the dollar sales volume the firm must achieve to reach the breakeven point? Show your answers graphically too.

B) Define the Degree of Operating Leverage (DOL), calculate it, and interpret it for this firm if the firm is planning to produce and sell 2,000 units of these stoves? What does DOL reflect?

C) Given your answer to part (c), what would be the projected effect upon EBIT (in %) if the firm's sales level should increase by 20%?

D) Define the Degree of Financial Leverage (DFL), calculate it, and interpret it if the firm sells 2,000 units. What does DFL reflect?

E) Define the Degree of Total Leverage (DTL) and given the above information, calculate it and interpret for this company. What does DFL reflect?

F) Given your findings above, is Red Hot using too much debt? How can the firm decrease various risks that it faces given what you have defined above?

Reference no: EM132002186

Questions Cloud

What evidence do you have to support your decision : What evidence do you have to support your decision? Based on the tools that you selected, provide a brief analysis of your market, using those tools.

What is the gain or loss just for the halibut restaurant : What is the gain or loss just for the Halibut Restaurant Co would replication on the sale of the equipment on January 2, 2018?

What are the actual cost of capital to the borrowers : What distinguishes a capital investment from other business investments? What are the actual cost of capital to the borrowers?

What assessment and evaluations tools were used : Present an executive summary to be given to each member of the EL of what has been accomplished, and what assessment and evaluations tools were used.

Define the degree of operating leverage : Define the Degree of Operating Leverage (DOL), Define the Degree of Financial Leverage (DFL), Define the Degree of Total Leverage (DTL)

What criteria is missing from the director proposal : Provide an analysis of what criteria is missing from the Director's proposal? What other measures would you include in order to make this proposal worth.

Make organizational change part of their culture : Why are successful companies less likely to change? what should companies do in order to make organizational change part of their culture?

Evaluating the factors relating to occupational psychology : Prepare a 2000-word essay evaluating the factors relating to occupational psychology of individual perceptions, attitudes and employee behaviours

Options instead of cash results in higher reported income : Paying executives with stock options instead of cash results in higher reported income

User Account

All Pages