Homework Answers
Solution:
a.The formula for calculating the Degree of Operating Leverage is
Degree of Operating Leverage = Contribution / Net Operating Income
As per the information given in the question we have
Net Operating Income = $ 293,000
Net sales = $ 960,000 ; Variable costs = $ 532,000
Contribution = Net sales – Variable costs = $ 960,000 - $ 532,000
= $ 428,000
Applying the above information in the formula we have
Degree of Operating Leverage = $ 428,000 / $ 293,000
= 1.4608
=1.46 ( when rounded off to two decimal places )
Thus the Degree of operating leverage = 1.46
b. The formula for calculating the Degree of Financial Leverage is
Degree of Financial Leverage = EBIT / EBT
As per the information given in the question we have
EBIT = $ 293,000 ; EBT = $ 112,000
Applying the above information in the formula we have
Degree of Financial Leverage = $ 293,000 / $ 112,000
= 2.6161
= 2.62 ( when rounded off to two decimal places )
Thus the Degree of Financial leverage = 2.62
c. The formula for calculating the Degree of Total Leverage is
Degree of Total Leverage = Degree of Operating Leverage * Degree of Financial Leverage
As per the information available we have
Degree of Operating Leverage = 1.4608 ; Degree of Financial Leverage = 2.6161
Applying the above information in the formula we have
Degree of Total Leverage = 1.4608 * 2.6161
= 3.8216
= 3.82 ( when rounded off to two decimal places )
Thus the Degree of Total leverage = 3.82
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(P&L) statement, provides a snapshot of the financial
performance of a company during a specified period of time. It
reports a firm’s gross income, expenses, net income, and the income
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shareholders.
The income statement is prepared using the generally accepted
accounting principles (GAAP) that match the firm’s revenues and
expenses to the period in which they were...
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