Week 3 - Finances Problems

a ) Old Plan

Fixed Cost 100 ,000

Price 28 /unit

Variable Cost 15 .50 /unit b ) New Plan

Fixed Cost 75 ,000

Price 28 /unit

Variable Cost 17 /unit c

Old Plan

Units Sold Operating Income DOL

0 0 .00 100 ,000 .00 100 ,000 .00 0 .00 (100 ,000 .00 ) 0 .00

10 ,000 155 ,000 .00 100 ,000 .00 255 ,000 .00 280 ,000 .00 25 ,000 .00 5 .00

20 ,000 310 ,000 .00 100 ,000 .00 410 ,000 .00 560 ,000 .00 150

,000 .00 1 .67

30 ,000 465 ,000 .00 100 ,000 .00 565 ,000 .00 840 ,000 .00 275 ,000 .00 1 .36

40 ,000 620 ,000 .00 100 ,000 .00 720 ,000 .00 1 ,120 ,000 .00 400 ,000 .00 1 .25

50 ,000 775 ,000 .00 100 ,000 .00 875 ,000 .00 1 ,400 ,000 .00 525 ,000 .00 1 .19 New Plan

Units Sold Operating Income DOL

0 0 .00 75 ,000 .00 75 ,000 .00 0 .00 (75 ,000 .00 ) 0 .00

10 ,000 170 ,000 .00 75 ,000 .00 245 ,000 .00 280 ,000 .00 35 ,000 .00 3 .14

20 ,000 340 ,000 .00 75 ,000 .00 415 ,000 .00 560 ,000 .00 145 ,000 .00 1 .52

30 ,000 510 ,000 .00 75 ,000 .00 585 ,000 .00 840 ,000 .00 255 ,000 .00 1 .29

40 ,000 680 ,000 .00 75 ,000 .00 755 ,000 .00 1 ,120 ,000 .00 365 ,000 .00 1 .21 50 ,000 850 ,000 .00 75 ,000 .00 925 ,000 .00 1 ,400 ,000 .00 475 ,000 .00 1 .16

Under the new plan , profitability is lower than the old plan at very high volume levels of units sold

Price 6 /unit

Fixed Cost Variable Cost

Rent 100 ,000 Factory labor 1 .20 /unit

Executive salaries 89 ,000 Raw material 0 .60 /unit FC 1 ,200 ,000 (including depreciation

P-VC 2 .40 /unit Fixed Cost 80 ,000

Price 10 /bag (50 pounds each bag

Variable Cost 0 .10 /pound

a b

Q 12 ,000 bags Q 25 ,000 bags c

Q 20 ,000 bags Q 25 ,000 bags The degree of operating leverage change as the quantity increases because the percent change on the operating income varies depending on the change on the sales .Capital Structure

Katz Plan Doberman Plan Doberman Plan (based on Katz 's Wife

Debt 800 ,000 .00 1 ,050 ,000 .00 1 ,050 ,000 .00 interes 9 interest 10 interest 10 interest

Common Stock 1 ,200 ,000 .00 1 ,050 ,000 .00 1 ,050 ,000 .00

Number of Shares 120 ,000 105 ,000 105 ,000 Income Statement

Katz Plan Doberman Plan Doberman Plan (based on Katz 's Wife

Units sold 2 ,000 ,000 2 ,800 ,000 2 ,800 ,000

Price 4 .00 3 .75 3 .75

Sales 8 ,000 ,000 .00 10 ,500 ,000 .00 10 ,500 ,000 .00

Fixed Costs 1 ,500 ,000 .00 1 ,500 ,000 .00 1 ,800 ,000 .00

Variable Costs 6...