Question

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships. Assume the Mitaka Company has a sales volume of 136,000 units at a price of $26 per unit; variable costs are $6 per unit, and fixed costs are $1,910,000. Interest expense is $411,000. What is the degree of combined leverage for this Japanese firm? (Round your answer to 2 decimal places.) Degree of combined leverage

Answer 1

The degree of combined leverage is computed as shown below:

= ( Sales - variable cost ) / ( Sales - variable cost - Fixed cost - interest expense)

Sales is computed as follows:

= 136,000 units x $ 26

= $ 3,536,000

Variable cost is computed as follows:

= 136,000 units x $ 6

= $ 816,000

So, the degree of combined leverage will be:

= ( $ 3,536,000 - $ 816,000 ) / ( $ 3,536,000 - $ 816,000 - $ 1,910,000 - $ 411,000 )

= $ 2,720,000 / $ 399,000

= 6.82 Approximately

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