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# Leverage and break-even points - Harmon Company 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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The Harmon Company manufactures skates. The company's income statement for 2004 is as follows:

Harmon 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

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

Harmon 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 ...

#### Solution Summary

Computations shown for you in Excel.

\$2.19