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    Calculating Operating, Financial & Combined Leverage

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    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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    Solution Preview

    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.

    $2.19

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