1. Musk is a smart phone manufacturing company. Currently Musk is selling 2000 phones every year at the price of $1000 each. The average variable cost for each phone is $400. Musk currently has the debt of $1,000,000 paying 6% annual rate of interest.

The annual depreciation expense for the company is $200,000.

Musk pays rent of $5,000 each month.

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The total wages of the employees for Musk are $500,000 for one year.

Answer all the queries with regards to Musk.

If the Tax rate is 0%

  1. Calculate and interpret the degree of operating leverage.
  2. Calculate and interpret the degree of Financial leverage.
  3. What is the net income for the current sales and cost structure? How much will be the change in the net income (in the % terms) for the given scenarios.
    1. If number of units sold changes from 2000 to 1950.
    2. If number of units sold changed from 2000 to 2010.
  4. What is the break-even quantity and break-even sales?
  5. What is the operating break-even quantity and operating break-even sales?


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