4G’s breakeven quantity of unit sales is closest to:

Mary Benn, CFA, is a financial analyst for Twin Fields Investments, located in Storrs,
Connecticut, U.S.A. She has been asked by her supervisor, Bill Cho, to examine two small
Japanese cell phone component manufacturers: 4G, Inc. and Qphone Corp. Cho indicates
that his clients are most interested in the use of leverage by 4G and Qphone. Benn states,
“I will have to specifically analyze each company’s respective business risk, sales risk, operating
risk, and financial risk.” “Fine, I’ll check back with you shortly,” Cho answers.
Benn begins her analysis by examining the sales prospects of the two firms. The results of
her sales analysis appear in Exhibit A. She also expects very little price variability for these cell
phones. She next gathers more data on these two companies to assist her analysis of their
operating and financial risk.
When Cho inquires as to her progress, Benn responds, “I have calculated Qphone’s
degree of operating leverage (DOL) and degree of financial leverage (DFL) at Qphone’s 2009
level of unit sales. I have also calculated Qphone’s breakeven level for unit sales. I will have
4G’s leverage results shortly.”
Cho responds, “Good, I will call a meeting of some potential investors for tomorrow.
Please help me explain these concepts to them, and the differences in use of leverage by these
two companies.” In preparation for the meeting, Cho says he has a number of questions:

“You mentioned business risk; what is included in that?”

“How would you classify the risk due to the varying mix of variable and fixed costs?”

“Could you conduct an analysis and tell me how the two companies will fare relative to
each other in terms of net income if their unit sales increased by 10 percent above their
2009 unit sales levels?”

“Finally, what would be an accurate verbal description of the degree of total leverage?”
The relevant data for analysis of 4G is contained in Exhibit B, while Benn’s analysis of
the Qphone data appears in Exhibit C.
EXHIBIT A Benn’s Unit Sales Estimates for 4G, Inc., and Qphone Corp.
Company 2009 Unit Sales
Standard Deviation
of Unit Sales
2010 Expected Unit
Sales Growth Rate
4G, Inc. 1,000,000 25,000 15%
Qphone Corp. 1,500,000 10,000 15%
EXHIBIT B Sales, Cost, and Expense Data for 4G, Inc.
(At Unit Sales of 1,000,000)
Number of units produced and sold 1,000,000
Sales price per unit f108
Variable cost per unit f72
Fixed operating cost f22,500,000
Fixed financing expense f9,000,000
EXHIBIT C Benn’s Analysis of Qphone (At Unit
Sales of 1,500,000)
Degree of operating leverage 1.40
Degree of financial leverage 1.15
Breakeven quantity (units) 571,429
A. 437,500 units.
B. 625,000 units.
C. 875,000 units.

Ans: C. 875,000 units.