a. Using EBIT values of $80,000 and $120,000, determine the associated

ACTIVITY 6
1. Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit.
a. Calculate the operating breakeven point in units.
b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, respectively.
c. With 10,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part b?
d. Use the percentages computed in part c to determine the degree of operating leverage (DOL).
e. Use the formula for degree of operating leverage to determine the DOL at 10,000 units.

2. Levin Corporation has fixed operating costs of $72,000, variable operating costs of $6.75 per unit, and a selling price of $9.75 per unit.
a. Calculate the operating breakeven point in units.
b. Compute the degree of operating leverage (DOL) using the following unit sales levels as a base: 25,000, 30,000, and 40,000.

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3. Southland Industries has $60,000 of 16% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnings per share (EPS) for the following levels of EBIT:
a. $24,600
b. $30,600
c. $35,000

4, Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%.
a. Using EBIT values of $80,000 and $120,000, determine the associated earnings per share (EPS).
b. Using $80,000 of EBIT as a base, calculate the degree of financial leverage (DFL).

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