1. Elizabeth Bicycle Company makes bicycles.  The firm’s income statement is as follows:


Elizabeth Bicycle Company

Income Statement



Sales (11,900 bicycles at $140)


Less:  Variable costs (11,900 bicycles at $60)


Fixed costs


Earnings before interest and taxes (EBIT)


  - Interest (I)


Earnings before taxes (EBT)


  - Taxes (T)


Earnings after taxes (EAT)







a.       Degree of operating leverage

b.      Degree of financial leverage

c.       Degreee of combined leverage

d.      The break-even point


2. Pringle Sock Company determines its break-even point strictly on the basis of cash expenditures related to fixed costs.  Its total fixed costs are $700,000, but 25 percent of this value is represented by depreciation.  Its contribution margin (price minus variable cost) for each unit is $6.00.  How many units does the firm need to sell to reach the cash break-even point?

3. Reworked Inc. makes winter hats out of recycled clothing that are very popular in the fall-winter season.  Units sold are anticipated as:


3,000 units


6,000 units


9,000 units


8,000 units


26,000 units


If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. 

However, Reworked decides to go with level production to avoid being out of merchandise.  They will produce the 26,000 items over four months at a level of 6,500 per month.

a.  What is the ending inventory at the end of each month?  Compare the unit sales to the units produced and keep a running total.  (Assume the beginning inventory for October is 0 units. )

b.  If the inventory costs $4 per unit and will be financed at the bank at a cost of 12%, what is the monthly financing cost and the total for the four months?  (Use 1 percent for the monthly rate.)

4.  Pointy Fork Inc. expects sales next year to be $350,000 if the economy is strong, $250,000, if the economy is steady, and $150,000 if the economy is weak.  The company believes there is a 25 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 25 percent probability of a weak economy.  What is the expected level of sales for the next year?

5.  Victor Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores.  Victor anticipates sales of 40,000 units per year, an ordering cost of $100 per order, and carrying costs of $2 per unit.

a. What is the economic ordering quantity?

b. How many orders will be placed during the year?

c. What will the average inventory be?

d. What is the total cost of ordering and carrying inventory?

6.  Sales for Burkhart Components would increase by $300,000 if credit is extended to some customers previously considered poor risks.  Eight percent of the new accounts receivable generated will prove to be uncollectible.  Additional collection costs will be 4% of sales, and production and selling costs will be 78% of sales.  The firm is in the 40% tax bracket.

a. Compute the incremental income after taxes.

b. What will Burkhart’s incremental return on sales be if these new credit customers are accepted?

c. If the receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will be Burkhart’s incremental return on investment?

7.  You invest a single amount of $20,000 for 5 years at 10%.  At the end of 5 years you take all of the proceeds (initial investment plus earned interest) and invest them for 8 years at 12%.  How much will you have after 13 years?

8. If you invest $14,000 today, how much will you have:

a. In 3 years at 5 percent?

b. In 15 years at 10 percent?

c. In 20 years at 12 percent?


d. In 20 years at 12 percent (compounded semiannually?)

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