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Calculating Operating, Financial & Combined Leverage

The following is an analytical income statement for The Swill & Spoon, a fine dining establishment:
Sales $ 150,000
Variable costs 90,000
Revenue before fixed costs $ 60,000
Fixed costs 35,000
EBIT $ 25,000
Interest expense $ 10,000
Earnings before taxes $ 15,000
Taxes (.34) 5,100
Net income $ 9,900
a. Calculate the degree of operating leverage at this output level.
b. Calculate the degree of financial leverage at this level of EBIT.
c. What is the degree of combined leverage?

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a. Operating Leverage is useful for comparing the change in Income (in this case Earnings Before Interest and Taxes) for a change in revenue. Since fixed costs will remain the same no matter what the revenue is, this ratio will tell you how much EBIT will grow for ...

Solution Summary

Calculating Operating, Financial & Combined Leverage from a sample income statement of a company.