Leverage and Breakeven

1. Rand Collections Limited sells miniature gold-plated replicas of famous sports, political, and entertainment
personalities. Each miniature is sold by Rand for $200. Rand's fixed cost is $200,000. In 1990, Rand sold
6000 miniatures. Total variable cost for 1990 was $600,000.
a) What was the company's pretax income in 1990?
b) How many miniatures must the company sell just to break even?
c) For 1991, the company expects a 25 percent increase in fixed costs.
1) What is the new break-even point in units (miniatures) if the price remains at $200?
2) By how much should the price per miniature be increased in order for the company to make the
same profit as in 1990, assuming the variable costs and the number of miniatures sold remain at
the 1990 level?
3) The production manager believes that efficiency increasing measures could be introduced in
1991 which would reduce per unit variable cost. Assuming that the selling price remains at
$200 per miniature, what reduction in the variable cost would result in the same break-even point
(in units) as in 1990?
2. Crescent Bahmann Limited sells Levis jeans. The sale price of one jean is Rs 550. Bahumann’s
fixed cost is Rs 400,000 In 2000, Bahmann sold 6000 jeans. Total variable cost for 2000 was
Rs1500, 000.
a) What was the company's pretax income in 2000?
b) How many jeans must the company sell just to break even?
c) For 2001, the company expects a 20 percent increase in fixed costs.
1) What is the new break-even point in units (jeans) if the price remains at Rs550?
2) By how much should the price per jean be increased in order for the company to make the same
profit as in 2000, assuming that the variable costs and the number of jeans sold remains at
the 2000 level?
3) The production manager believes that efficiency increasing measures could be introduced in
2001 which would reduce per unit variable cost per unit. Assuming that the selling price
remains at Rs550 per unit, what reduction in the variable cost would result in the same break-
even point (in units) as in 2000?
3. The capital Structure of Evergreen Corporation consists of an ordinary share capital of Rs.
1,000,000 (share of Rs 100 par value) and Rs 1,000,000 of 10% debentures. The selling price is
Rs 10 per unit, Variable costs amount to Rs 6/unit and fixed costs are Rs 200,000. Income tax rate
is 50%. If Sales increase by 20% from 100,000 to 120,000 units, Calculate:
a) The percentage increase in EPS
b) The Break-even point at 100,000 and 120,000 units.
c) The DFL at 100,000 and 120,000 units
d) The DOL at 100,000 and 120,000 units.
e) Determine the percentage increase in EBIT needed to double EPS.
4. Chaudary Asad owns Strings Attached, a store that sells guitars. The company has Rs.5 million in
current annual sales, fixed operating costs of Rs.300,000 and Rs.700,000 in variable operating
costs, for a total EBT of Rs.2.5 million. The firm has debt of Rs.16, 666,666.67, on which it pays
9 percent annual interest.
Calculate DOL & DFL for Strings Attached? If sales next year increase by 20%, what will be the
% age change in net income? What is its B.E at both sales levels? The tax rate is 40%.

5. XYZ Ltd has an average selling price of Rs. 10 per unit. Its variable unit costs are Rs 7,
and fixed costs amount to Rs 170,000. It finances all its assets by equity funds. It pays 50%
tax on its income. ABC Ltd is identical to XYZ Ltd, except in respect of the pattern of
financing. ABC Ltd Finances its assets 50% by equity and 50% by debt, the interest on
which amounts to Rs 20,000.
Determine the degree of operating, financing, and combined leverages at Rs 700,000 Sales level,
for both the firms and interpret the results.