Problem:
A. Analyze Ryan Boot Company, using ratio analysis. Compute the ratios.
B. In your analysis, calculate the overall break-even point in sales dollars and the cash break-even point.
| Ryan Boot CompanyAnalysis Ratios | |||
| Ryan Boot | Industry | ||
| Profit margin | $292,500 ÷ 7,000,000 | 4.18% | 5.75% |
| Return on assets | $292,500 ÷ 8,130,000 | 3.60% | 6.90% |
| Return on equity | $292,500 ÷ 2,880,000 | 10.16% | 9.20x |
| Receivables turnover | $7,000,000 ÷ 3,000,000 | 2.33x | 4.35x |
| Inventory turnover | $7,000,000 ÷ 1,000,000 | 7.00x | 6.50x |
| Fixed asset turnover | $7,000,000 ÷ 4,000,000 | 1.75x | 1.85x |
| Total asset turnover | $7,000,000 ÷ 8,130,000 | 0.86x | 1.20x |
| Current ratio | $4,130,000 ÷ 2,750,000 | 1.50x | 1.45x |
| Quick ratio | $3,130,000 ÷ 2,750,000 | 1.14x | 1.10x |
| Debt to total assets | $5,250,000 ÷ 8,130,000 | 64.58% | 25.05% |
| Interest coverage | $700,000 ÷ 250,000 | 2.80x | 5.35x |
| Fixed charge coverage | ($700,000 + $200,000)/$250,000 + $200,000 + ($65,000/ (1-.35) = $900,000/$550,000 | 1.64x | 4.62x |
Answer:
B. BEP in sales dollars
First we must calculate the contribution margin.
CM = Sales – Variable expenses
CM = $7,000,000 – 4,200,000
CM = $2,800,000
Contribution Margin Ratio = CM ÷ Sales
CMR = $2,800,000 ÷ 7,000,000
CMR = 40%
BEP = Total Fixed Assets ÷ CMR
BEP = $2,100,000 ÷ 40%
BEP = $5,250,000 in sales dollars
Cash BEP = same as above accept the non cash expenses would be removed from the fixed assets per the instructor help.
Cash BEP = (TFA – Non Cash expenses) ÷ CMR
Cash BEP = ($2,100,000 – 500,000) ÷ 40%
Cash BEP = $1,600,000 ÷ 40%
Cash BEP = $4,000,000