Degree of operating leverage, degree of financial leverage, combined leverage, break-even point in units
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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.
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Solution Summary
The solution describes how to calculate the degree of operating, financial, and combined leverage for a skate manufacturer.
Solution Preview
a. Degree of operating leverage = (Sales - variable cost)/EBIT
=(750000-210000)/270000=2.00
b. ...
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