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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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    Solution Summary

    This posting contains 2 problems on BEA:degree of financial leverage, degree of combined leverage, and the break-even point in units.

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