TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It currently has 20,000 shares of common stock outstanding. Assume that the firm is subject to a 40% tax rate.
a. At what level of sales (in units) would the firm break even on operations (that is,
EBIT 5 $0)?
b. Calculate the firm’s earnings per share (EPS) in tabular form at (1) the current
level of sales and (2) a 120,000-unit sales level.
c. Using the current $750,000 level of sales as a base, calculate the firm’s degree of
operating leverage (DOL).
d. Using the EBIT associated with the $750,000 level of sales as a base, calculate
the firm’s degree of financial leverage (DFL).
e. Use the degree of total leverage (DTL) concept to determine the effect (in percentage
terms) of a 50% increase in TOR’s sales from the $750,000 base level on its
earnings per share.
