Chapter 11

DOL=(sales-variable costs)/(sales-variable costs -fixed costs) Step 1: Find variable costs: (40%)(1,250,000 sales estimate)=500,000 variable costs. Step 2: (1,250,000-500,000)/(1,250,000-500,000-431,469)=750,000/318,531= 2.35 *2 decimal place

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $431,469. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL)

Step 1: 1,160,251-73.35%=851,044.1085 variable Step 2: sales-variable:1,160,251-851,044.1085= 309,206.8915 contribution margin Step 3: contribution margin/sales= 309,206.8915/1,160,251= 0.266500 Step 4: fixed costs/number in step 3=450,000/0.266500= $1,688,555.3 one decimal place

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 73.35% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,160,251. Calculate the firm's operating breakeven level of sales.

DTL=(sales-variable costs)/(sales-variable costs-fixed costs-interest expense) Step 1: Find Variable Costs=(3,000,000)(60%)=1,800,000 Step 3: (3,000,000-1,800,000)/(3,000,000-1,800,000-469,957-500,000)=1,200,000/230,043=5.22 Two decimal places

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $469,957 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)?

The DOL relates the change in sales to the change in net operating income

The degree of operating leverage has which of the following characteristics?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales

Which of the following statements is correct?

increased, increased

Generally increases in leverage result in___return and___risk

maximizes the owners wealth

In theory a firm should maintain financial leverage consistent with a capital structure that

DFL=EBIT/(EBIT-Interest expense) Step 1: Find EBIT which is your "operating income" or sales-variable costs-operating costs. Operating income was given as: 700,000 so that is EBIT Step 3: DFL=700,000/(700,000-517,538):700,000/182,462= 3.84 Two decimal places

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $517,538. What is the company's degree of financial leverage (DFL)?

Leverage

__results from the used of fixed-cost assets or funds to magnify returns to a firm's owners