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Degree of operating leverage, degree of financial leverage, combined leverage, break-even point in units

A Company manufactures skates. The company's income statement for 2004 is as follows:

The Company

Income Statement

For the Year Ended December 31, 2004

Sales (30,000 skates @ $25 each)...........................
$750,000

Less: Variable costs (30,000 skates at $7)............
210,000

Fixed costs..........................................................
270,000

Earnings before interest and taxes (EBIT).............
270,000

Interest expense......................................................
170,000

Earnings before taxes (EBT)...................................
100,000

Income tax expense (35%)......................................
35,000

Earnings after taxes (EAT).....................................

$65,000

Given this income statement, compute the following:

a. Degree of operating leverage.

b. Degree of financial leverage.

c. Degree of combined leverage.

d. Break-even point in units.

Solution Preview

a. Degree of operating leverage = (Sales - variable cost)/EBIT
=(750000-210000)/270000=2.00

b. ...

Solution Summary

The solution describes how to calculate the degree of operating, financial, and combined leverage for a skate manufacturer.

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