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# degree of financial leverage,degree of combined leverage,BEP

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Draw two break-even graphs-one for a conservative firm using labor-intensive production and another for a
capital-intensive firm. Assuming these companies compete within the same industry and have identical sales,
explain the impact of changes in sales volume on both firms' profits.

Although no example is provided in the textbook problem, we suggest you use these assumptions to
create an Excel line chart (break-even chart).

Labor Capital
Intensive Intensive
Selling price \$12.00 \$12.00
Variable cost per unit \$8.00 \$5.00
Fixed costs \$250,000 \$300,000

Prob 5-9
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.

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