Degree of operating leverage :sample question
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2.The Sterling Tire Company income statement for 2006 is as follows:
Sterling Tire Company
Income Statement
For the Year Ended December 31, 2006
Sales (20,000 tires at $60 each) $1,200,000
Less: Variable costs (20,000 tires at $30) 600,000
Fixed costs 400,000
Earnings before interest and taxes (EBIT) 200,000
Interest expense 50,000
Earnings before taxes (EBT) 150,000
Income tax expense (40%) 60,000
Earnings after taxes (EAT) $ 90,000
Given this income statement, compute the following:
1.Degree of operating leverage.
2.Degree of financial leverage.
3.Degree of combined leverage.
4.Break-even point in units.
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Response provides steps to compute the Degree of operating leverage.
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The Sterling Tire Company income statement for 2006 is as follows:
Sterling Tire Company
Income Statement
For the Year Ended December 31, 2006
Sales (20,000 tires at $60 each) $1,200,000
Less: Variable costs (20,000 tires at $30) 600,000
Fixed costs 400,000
Earnings before interest and taxes (EBIT) 200,000
Interest expense 50,000
Earnings before taxes (EBT) 150,000
Income tax expense (40%) 60,000
Earnings after taxes (EAT) $ ...
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