Question

Straight Arrow Company manufactures golf balls. The following income statement information is relevant for Straight Arrow in 2016:
Selling price per sleeve of balls (P) ............... $ 5.00
Variable cost of goods sold as a percentage of price (V) ...... 75%
Fixed operating costs (F) ................... $50,000
Interest expense (I) ...................... $10,000
Preferred dividends (Dps) .................. $ 0.00
Marginal tax rate (T) .................... 40%
Number of common shares ................... 20,000
a. What level of sales does Straight Arrow need to achieve in 2016 to break even with respect to operating income?
b. At its breakeven point, what will be Straight Arrow’s EPS?
c. If Straight Arrow expects its sales to reach $300,000 in 2016, what is its degree of operating leverage, its degree of financial leverage, and its degree of total (combined) leverage? Based on the degree of total leverage, compute the EPS you would expect in 2016 if sales actually turn out to be $270,000.



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  • CreatedNovember 24, 2014
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