The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows: HARDING COMPANY...
The Harding Company manufactures skates. The company’s income
statement for 20X1 is as follows:
| HARDING COMPANY | ||
| Income Statement | ||
| For the Year Ended December 31, 20X1 | ||
| Sales (12,500 skates @ $100 each) | $ | 1,250,000 |
| Variable costs (12,500 skates at $45) | 562,500 | |
| Fixed costs | 400,000 | |
| Earnings before interest and taxes (EBIT) | $ | 287,500 |
| Interest expense | 72,500 | |
| Earnings before taxes (EBT) | $ | 215,000 |
| Income tax expense (20%) | 43,000 | |
| Earnings after taxes (EAT) | $ | 172,000 |
a. Compute the degree of operating leverage.
(Round your answer to 2 decimal places.)
b. Compute the degree of financial leverage.
(Round your answer to 2 decimal places.)
Homework Answers
| Sales | 1250000 |
| Variable costs | 562500 |
| Contribution margin | 687500 |
| a. | |
| Degree of operating leverage = Contribution margin / EBIT = 687500 / 287500 | 2.39 |
| b. | |
| Degree of financial leverage = EBIT / EBT = 287500 / 215000 | 1.34 |
SOLUTION :
a.
Degree of operating leverage (DOL)
= (Sales - Variable costs)/EBIT
= (1250000 - 562500) / 287500
= 566400 / 236400
= 2.3913
= 2.39 (ANSWER)
b.
Degree of financial leverage (DFL)
= EBIT / EBT
= 287500 / 215000
= 1.3372
= 1.34 (ANSWER).
Add Answer to:
The Harding Company manufactures skates. The company’s income
statement for 20X1 is as follows:
HARDING COMPANY...
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