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    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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    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) $ ...

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    Response provides steps to compute the Degree of operating leverage.

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