The Harley Health Club has asked you to review aspects of its financial condition, specifically its break even point and its use of leverage.
Management has supplied you with the following company information, along with corresponding data for the industry.
Price per Unit $500.00 $525.00
Unit Sales (Memberships) 420,000 450,000
Interest expense $1,000,000 $2,000,000
Variable Costs (% Sales) 55.00% 58.00%
Fixed Costs $65,000,000 $55,000,000
Common Shares 5,000,000 7,000,000
Taxes 36.00% 36.00%
Use the following headings for your comparison:
Less: Variable Costs
Less: Fixed Costs
Less: Interest Expense
Earnings before Taxes
Earnings per Share
Break-even Point (Units)
Break-even Point ($)
Degree of Operating Leverage
Degree of Financial Leverage
Degree of Combined Leverage
Are there any significant financial changes you would suggest to management as a result of this analysis?
Sales $210,000,000.00 $236,250,000.00
Less: Variable Costs $115,500,000.00 $137,025,000.00
Contribution $94,500,000.00 $99,225,000.00
Less: Fixed Costs $65,000,000 $55,000,000
EBIT $29,500,000.00 $44,225,000.00
Less: Interest Expense $1,000,000 $2,000,000 ...
The solution reviews aspects of Harley Health Club financial conditions and discusses its break even point and its use of leverages.