During the most recent fiscal year, Medical Electronics Corporation sold 2,560,000 health monitoring devises at $60...

During the most recent fiscal year, Medical Electronics Corporation sold 2,560,000 health monitoring devises at $60 per unit. Variable operating costs were 60% of sales ($36 per unit), while fixed operating costs were $12,288,000. The cost of outstanding debt (interest expense) was $4,152,000. Medical Electronics Corporation’s tax rate is 30%. The company does not sell any other product. (PLEASE SHOW YOUR WORK).

a) Construct Medical Electronics Corporation’s income statement for the most recent fiscal year (complete the following table).

Sales
Less: Variable operating costs
Fixed operating costs
Earnings before interest and taxes (EBIT)
Less: Interest expense
Earnings before taxes (EBT)
Less taxes (30%)
Earnings after taxes (EAT)

b) Compute the degree of operating leverage (DOL)

c) Interpret the calculated DOL.

Expert Solution

a		$
	Sales	153,600,000
	Less: Variable operating costs	92,160,000
	Contribution	61,440,000
	Fixed operating costs	12,288,000
	Earnings before interest and taxes (EBIT)	49,152,000
	Less: Interest expense	4,152,000
	Earnings before taxes (EBT)	45,000,000
	Less taxes (30%)	13,500,000
	Earnings after taxes (EAT)	31,500,000

b	Degree of operating leverage (DOL)
	Contribution Margin / Operating income
	61440000 / 49152000	1.25

c	The Degree of Operating Leverage (DOL) is the leverage ratio that sums up the effect of an amount of operating leverage on the company’s earnings before interests and taxes (EBIT).
	. If the degree of operating leverage is high, it means that the earnings before interest and taxes would be unpredictable for the company, even if all the other factors remain the same.

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