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    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 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.

    $2.49

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