P12-4 Breakeven analysis Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500.
a. Find the operating breakeven point in number of CDs.
b. Calculate the total operating costs at the breakeven volume found in part a.
c. If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business?
d. How much EBIT will Barry realize if he sells the minimum 2,000 CDs per month noted in part c?

P12-4 Answers

a. 21,000 CDs
b. Total Operating Costs = FC + (Q x VC) = $73,500 + (21,000 x $10.48) = $293,580
c. Yes, Barry should go into the music business because 2,000 x 12 = 24,000 CDs, which is more than the breakeven amount by 3,000 CDs per year.
d. EBIT = (P x Q) – FC – (VC x Q) = (13.98 x 24,000) – 73,500 – (10.48 x 24,000)
= $335,520 – 73,500 – 251,520 = $10,500

P12-11 EPS calculations Southland Industries has $60,000 of 16% (annual interest) bonds
outstanding, 1,500 shares of preferred stock paying annual dividend of $5 per share, and 4,000
shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute
earnings per share (EPS) for the following levels of EBIT:

a. $24,600
b. $30,600
c. $35,000

P12-11 Answers

P12-24 Integrative – Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment:

a. Calculate earnings per share for each level of...