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    Sosa Company Baseball Gloves

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    The Sosa Company produces baseball gloves. The company's income statement for 2004 is as follows:
    SOSA COMPANY
    Income Statement
    For the Year Ended December 31, 2004
    Sales (20,000 gloves at $60 each) $1,200,000
    Less: Variable costs (20,000 gloves at $20) 400,000
    Fixed costs 600,000
    Earnings before interest and taxes (EBIT) 200,000
    Interest expense 80,000
    Earnings before taxes (EBT) 120,000
    Income tax expense (30%) 36,000
    Earnings after taxes (EAT) $ 84,000
    Given this income statement, compute the following:
    1. Degree of operating leverage.
    2. Degree of financial leverage.
    3. Degree of combined leverage.

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    Solution Preview

    # of units 20,000
    Sales @ $60 per unit= $1,200,000
    Less Variable Cost @ $20 per unit= $400,000
    Contribution= $800,000 =$1,200,000. - $400,000.
    Less Fixed Cost= $600,000
    EBIT= $200,000 =$800,000. - ...

    Solution Summary

    Calculates degree of operating leverage, degree of financial leverage and degree of combined leverage for a company using its income statement.

    $2.19

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