Question

CHAPTER FIVE HOMEWORK 6 Saved 2 The Harding Company manufactures skates. The company's income statement for 20X1 is as follows 1.66 points HARDING COMPANY Income Statement For the Year Ended December 31, 20x1 Sales (10,500 skates $60 each) Variable costs (10,500 skates at $25) Pixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (30) Earnings after taxes (EAT) $ 630,000 262,500 200,000 167,500 62,500 105, 000 31,500 eBook Ce $ 73,500 Hint a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) Print Degree of operating leverage References b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.) Degree of financial leverage < Prey 2 of 3 Next >

Answer 1

Answer a.

Degree of Operating Leverage = [Sales - Variable Costs] / [Sales - Variable Costs - Fixed Costs]
Degree of Operating Leverage = [$630,000 - $262,500] / [$630,000 - $262,500 - $200,000]
Degree of Operating Leverage = $367,500 / $167,500
Degree of Operating Leverage = 2.19

Answer b.

Degree of Financial Leverage = Earnings before interest and taxes / Earnings before taxes
Degree of Financial Leverage = $167,500 / $105,000
Degree of Financial Leverage = 1.60

Answer c.

Degree of Combined Leverage = Degree of Operating Leverage * Degree of Financial Leverage
Degree of Combined Leverage = 2.19 * 1.60
Degree of Combined Leverage = 3.46

Answer d.

Selling Price per unit = $60
Variable Cost per unit = $25

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $60 - $25
Contribution Margin per unit = $35

Breakeven Point in units = Fixed Costs / Contribution Margin per unit
Breakeven Point in units = $200,000 / $35
Breakeven Point in units = 5,714