Q.5 Jim Korp designs game cartridges for home computers. His total fixed cost for designing a game package is $4,000. The cartridges the game is programmed into cost $4 each, and he sells them for $20 each. He currently sells 300 cartridges for each game he designs.

a.What are his break-even point, Net Operating Income, and Degree of Operating Leverage now?

b.If the price of a cartridge rises to $6 and he simultaneously raises the sales price to $22, what will the new break-even point, Net Operating Income, and Degree of Operating Leverage be?

Q.7 The Godfrey Vending Company plans to replace 10 of its vending machines with newer models. The current machines were purchased three years ago for $8,000 each and are being depreciated (straight-line) to a salvage value of $2,000 five years from now. The machines collectively generate annual revenues of $30,000 and annual expenses of $12,000. New machines can be purchased for $12,000 each and will be depreciated (straight-line) to a salvage value of $7,000 five years from now. The new machine will generate annual sales of $40,000 because of less downtime than the old machines and annual expenses of $8,000 (smaller repair bills than the old machines).

a. If Godfrey's marginal tax rate is 25%, what will be the incremental change in its annual cash flow if the old machines are replaced?