Question

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $473,391. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places. Question 2 5 pts A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 42.55% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,192,911. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places. Question 3 5 pts Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $458,448 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places. Question 4 5 pts Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $562,916. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.

Answer 1

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Step-by-step explanation:

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Answer 2

The degree of operating leverage (DOL), operating breakeven level of sales, degree of total leverage (DTL), and degree of financial leverage (DFL) are important concepts in business finance. The DOL measures the sensitivity of operating income to changes in sales, while the operating breakeven level of sales indicates the sales level required to cover all costs. The DTL and DFL measure the impact of sales and operating income on a firm's earnings per share (EPS).

Step-by-step explanation:

The degree of operating leverage (DOL) is a measure that indicates how sensitive a firm's operating income is to changes in sales. It is calculated by dividing the percentage change in operating income by the percentage change in sales. In this case, we can calculate the DOL using the formula: DOL = (Sales - Variable cost) / (Sales - Variable cost - Fixed cost). Using the given information, we have: DOL = ($1,250,000 - 0.4 * $1,250,000) / ($1,250,000 - 0.4 * $1,250,000 - $473,391). Plugging in the values, we get DOL ≈ 1.71.

The operating breakeven level of sales is the point at which a firm's total costs are equal to its total sales, resulting in zero operating income. It can be calculated using the formula: Operating breakeven level of sales = Fixed cost / (1 - Variable cost ratio). In this case, we have: Operating breakeven level of sales = $450,000 / (1 - 0.4255). Plugging in the values, we get the operating breakeven level of sales ≈ $783,135.15.

The degree of total leverage (DTL) measures the change in a firm's earnings per share (EPS) for a given percentage change in sales. It is calculated by multiplying the degree of operating leverage (DOL) by the degree of financial leverage (DFL). In this case, we can calculate the DTL using the formula: DTL = DOL * DFL. Given the DOL from the previous question and the interest expense of $500,000, we can calculate the DFL using the formula: DFL = (EBIT + Interest expense) / EBIT. Plugging in the values, we have DFL = ($3,000,000 - 0.6 * $3,000,000 + $500,000) / ($3,000,000 - 0.6 * $3,000,000). Simplifying the expression, we get DFL ≈ 1.67. Finally, we can calculate the DTL as DTL = DOL * DFL ≈ 1.71 * 1.67 ≈ 2.86.

The degree of financial leverage (DFL) measures the change in a firm's earnings before interest and taxes (EBIT) for a given percentage change in operating income. It is calculated by dividing the percentage change in EBIT by the percentage change in operating income. In this case, we can calculate the DFL using the formula: DFL = (EBIT + Interest expense) / EBIT. Given the current operating income of $700,000 and the interest expense of $562,916, we have DFL = ($700,000 + $562,916) / $700,000 ≈ 1.8.