Operating leverage and business risk

Reference no: EM131000402

HKOPEN is evaluating two different operating structures which are described below. The firm has annual interest expense of $250, common shares outstanding of 1,000, and a tax rate of 40%.

	Fixed costs	Price per unit	Variable cost per unit
Operating structure1:	$500	$1	$0.75
Operating structure 2:	$1,200	$1	$0.70

Required:

(a) For each operating structure, calculate:

i. EBIT and EPS at 10,000, 20,000, and 30,000 units

ii. The degree of operating leverage (DOL) and degree of combined leverage (DCL) using 20,000 units as a base sales level

iii. The operating breakeven point in units.

(b) Which operating structure has greater operating leverage and business risk? Explain.

Reference no: EM131000402

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