Investments
Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 17, Problem 17PS

A

Summary Introduction

To calculate: The expected profit based on the given expectation is to be determined.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

A

Expert Solution
Check Mark

Answer to Problem 17PS

The expected profit isInvestments, Chapter 17, Problem 17PS , additional homework tip  1

Explanation of Solution

The following formula will be used for the calculation of the expected profit −

  Investments, Chapter 17, Problem 17PS , additional homework tip  2Equ (1)

Given that −

Revenue = $120,000

Fixed costs = $30,000

Revenue costs Investments, Chapter 17, Problem 17PS , additional homework tip  3

Put the given values in Equ (1) −

  Investments, Chapter 17, Problem 17PS , additional homework tip  4

Expected profit Investments, Chapter 17, Problem 17PS , additional homework tip  5

B

Summary Introduction

To calculate: the degree of operating leverage based on the estimate of the fixed cost and expected profits.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

B

Expert Solution
Check Mark

Answer to Problem 17PS

The degree of operating leverage is Investments, Chapter 17, Problem 17PS , additional homework tip  6

Explanation of Solution

The following formula will be used for the calculation of the degree of the operating leverage −

  Investments, Chapter 17, Problem 17PS , additional homework tip  7Equ (2)

Given that −

Fixed costs = $30,000

Expected profits = $50,000

Put the given values is Equ (2)

  Investments, Chapter 17, Problem 17PS , additional homework tip  8

DOL = Investments, Chapter 17, Problem 17PS , additional homework tip  9Or

The degree of operating leverage = Investments, Chapter 17, Problem 17PS , additional homework tip  10

C

Summary Introduction

To calculate: the decrease in profits when sales are below 10% expectation.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

C

Expert Solution
Check Mark

Answer to Problem 17PS

The decrease in profits is Investments, Chapter 17, Problem 17PS , additional homework tip  11

Explanation of Solution

The following formula will be used for the calculation of the expected profit −

  Investments, Chapter 17, Problem 17PS , additional homework tip  12Equ (3)

Given that −

DOL = 1.6

Given that −

Revenue = $120,000

Fixed costs = $30,000

Revenue costs Investments, Chapter 17, Problem 17PS , additional homework tip  13

Decrement in sales = Investments, Chapter 17, Problem 17PS , additional homework tip  14

Put the given values in Equ (3)

The calculation of the profit after the decrement in sale can be given as −

  Investments, Chapter 17, Problem 17PS , additional homework tip  15

Expected profit after the decrement in sale = Investments, Chapter 17, Problem 17PS , additional homework tip  16

From the part (a), expected profit before decrement in sale Investments, Chapter 17, Problem 17PS , additional homework tip  17

Then the decrease in profit = Investments, Chapter 17, Problem 17PS , additional homework tip  18

D

Summary Introduction

To calculate: It is to be proved that the percentage decrease in profits equal to the DOL times 10% drop in sales.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

D

Expert Solution
Check Mark

Answer to Problem 17PS

The percentage decrease in profit isInvestments, Chapter 17, Problem 17PS , additional homework tip  19

Explanation of Solution

The following formula will be used for the calculation of the percentage decrease −

  Investments, Chapter 17, Problem 17PS , additional homework tip  20Equ (4)

Put the calculated values in Equ (4)

  Investments, Chapter 17, Problem 17PS , additional homework tip  21

The percentage decrease = Investments, Chapter 17, Problem 17PS , additional homework tip  22which prove that the decrease in profits equal to the DOL times Investments, Chapter 17, Problem 17PS , additional homework tip  23drop in sales.

E

Summary Introduction

To calculate: The largest percentage shortfall in sales relative to the original expectation.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

E

Expert Solution
Check Mark

Answer to Problem 17PS

The decrease in sales is Investments, Chapter 17, Problem 17PS , additional homework tip  24

Explanation of Solution

The following formula will be used for the calculation of the decrease in sales −

  Investments, Chapter 17, Problem 17PS , additional homework tip  25Equ (5)

Given that −

DOL = 1.6

Put the given value in Equ (5)

  Investments, Chapter 17, Problem 17PS , additional homework tip  26

The decrease in sales = Investments, Chapter 17, Problem 17PS , additional homework tip  27

F

Summary Introduction

To calculate: The break-even sales at this point are to be determined.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

The break-even point can be defined as the point at which total cost and total revenue are equal to each other or even to each other.

F

Expert Solution
Check Mark

Answer to Problem 17PS

The break-even sale is

  Investments, Chapter 17, Problem 17PS , additional homework tip  28

Explanation of Solution

From the above the revenue which decreases by Investments, Chapter 17, Problem 17PS , additional homework tip  29and which is Investments, Chapter 17, Problem 17PS , additional homework tip  30of the original revenue.

The following formula will be used for the calculation of the break-even sales −

  Investments, Chapter 17, Problem 17PS , additional homework tip  31Equ (6)

Put the given value in above Equ

  Investments, Chapter 17, Problem 17PS , additional homework tip  32

Then the break-even sales = $45,000

G

Summary Introduction

To calculate: The profit at break-even level of sales to prove that the part (f) is correct.

Introduction:

The expected profit can be defined as the probability to get the certain profit times the profit on business.

Degree of leverage is used to measure the change that will occur in operating income of the company when there is any change in sales.

The break-even point can be defined as the point at which total cost and total revenue are equal to each other or even to each other.

G

Expert Solution
Check Mark

Answer to Problem 17PS

The expected profit at break-even level is $0.

Explanation of Solution

The following formula will be used for the calculation of the expected profit at the break-even level −

  Investments, Chapter 17, Problem 17PS , additional homework tip  33Equ (7)

Given that −

Revenue = $45,000

Fixed costs = $30,000

Revenue costs Investments, Chapter 17, Problem 17PS , additional homework tip  34

Put the given values is above Equ (7) −

  Investments, Chapter 17, Problem 17PS , additional homework tip  35

The expected profit = $0, this shows that the answer of the part (f) is correct.

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