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)
1,666,000
Less: Variable costs (11,900 bicycles at $60)
714,000
Fixed costs
520,000
Earnings before interest and taxes (EBIT)
432,000
– Interest (I)
125,000
Earnings before taxes (EBT)
307,000
– Taxes (T)
122,800
Earnings after taxes (EAT)
184,200
 
 
Compute
Degree of operating leverage
Degree of financial leverage
Degreee of combined leverage
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:
October
3,000 units
November
6,000 units
December
9,000 units
January
8,000 units
Total
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…