Hatfield, Inc. sells its product for $14.00. Variable costs are $9.00 per unit, and Hatfield has $800,000 in fixed costs. Assume that Hatfield has $1.0 million in total debt and equity and a 40% tax rate. What is Hatfield's ROCE when sales are at 10% above breakeven?
A)4.8%
B)1.4%
C)7.6%
D)9.1%

Question

Quizplus · Accepted Answer

To calculate the Return on Capital Employed (ROCE) when sales are 10% above breakeven, we first need to find the breakeven point in units, then calculate earnings before interest and taxes (EBIT), and finally compute ROCE.1. Calculate breakeven point in units:$$ \text{Breakeven Point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} = \frac{800,000}{14 - 9} = \frac{800,000}{5} = 160,000 \text{ units} $$2. Calculate sales at 10% above breakeven:$$ \text{Sales at 10% above breakeven} = 160,000 \times 1.10 = 176,000 \text{ units} $$3. Calculate total sales revenue:$$ \text{Total Sales Revenue} = 176,000 \times 14 = 2,464,000 $$4. Calculate total variable costs:$$ \text{Total Variable Costs} = 176,000 \times 9 = 1,584,000 $$5. Calculate Earnings Before Interest and Taxes (EBIT):$$ \text{EBIT} = \text{Total Sales Revenue} - \text{Total Variable Costs} - \text{Fixed Costs} = 2,464,000 - 1,584,000 - 800,000 = 80,000 $$6. Calculate Earnings After Taxes (EAT) considering a 40% tax rate:$$ \text{EAT} = \text{EBIT} \times (1 - \text{Tax Rate}) = 80,000 \times (1 - 0.40) = 80,000 \times 0.60 = 48,000 $$7. Calculate Return on Capital Employed (ROCE):$$ \text{ROCE} = \frac{\text{EAT}}{\text{Total Debt and Equity}} = \frac{48,000}{1,000,000} = 0.048 \text{ or } 4.8\% $$Therefore, the correct answer is A) 4.8%.