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Excel - Operating Leverage

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.

Harley 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:

Harley Industry

Sales
Less: Variable Costs
Less: Fixed Costs
EBIT
Less: Interest Expense
Earnings before Taxes
Taxes
Net Income

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?

Solution Preview

Harley Industry

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 ...

Solution Summary

The solution reviews aspects of Harley Health Club financial conditions and discusses its break even point and its use of leverages.

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