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Degree of operating leverage :sample question

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.

Solution Preview

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) $ ...

Solution Summary

Response provides steps to compute the Degree of operating leverage.

$2.19