Description of Leverage Analysis and Break-Even Analysis
Not what you're looking for?
Please answer the following questions:
1. An analytical income statement for Detroit Heat Treating is shown below. It is based on an output (sales) level of 40,000 units.
Sales $480,000
Variable costs _2_8__0_,_0_0_0
Revenue before fixed costs $200,000
Fixed costs _1_2__0_,_0_0_0
EBIT $ 80,000
Interest expense __3__0_,_0_0_0
Earnings before taxes $ 50,000
Taxes __2_5__,_0_0_0
Net income $____2__5____,__0__0__0
a. Calculate the degree of operating leverage at this output level.
b. Calculate the degree of financial leverage at this level of EBIT.
c. Determine the combined leverage effect at this output level.
2. You are employed as a financial analyst for a single-product manufacturing firm. Your supervisor has made the following cost structure information available to you, all of which pertains to an output level of 1,600,000 units.
Return on operating assets = 15%
Operating asset turnover = 5 times
Operating assets = $3 million
Degree of operating leverage = 8 times
Your task is to find the break-even point in units of output for the firm.
Purchase this Solution
Solution Summary
This solution is comprised of a step by step analysis, which includes all required calculations, which shows how to compute leverage analysis and find the break-even point.
Solution Preview
1. a. Calculate the degree of operating leverage at this output level.
DOL=(sales-variable cost)/(sales-variable cost-fxed cost)
Sales 480000
Less: Variable Cost 280000
Contribution 200000
Less Fixed Cost 120000
EBIT 80000
DOL 2.50
b. Calculate the degree of financial ...
Purchase this Solution
Free BrainMass Quizzes
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Motivation
This tests some key elements of major motivation theories.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.