Question

In: Finance

Khan Inc. is a small manufacturer of face masks. Last year, 50,000 masks were sold for...

Khan Inc. is a small manufacturer of face masks. Last year, 50,000 masks were sold for $20 each. The income statement is as follows:

Sales 1,000,000

Less variable cost 400,000

Less fixed cost 200,000

EBIT 400,000

Less interest 125,000

EBT 275,000

Less tax 40% 110,000

EAT 165,000

EPS (100,000 shares) 1.65

Find DOL, DFL and degree of total leverage. If sales increase by 5% what effect will it have on the EPS?

Expert Solution

Income statement
Particulars	$
Sales	$ 1,000,000
Less: Variable costs	$ 400,000
Contribution	$ 600,000
Less: Fixed Costs	$ 200,000
EBIT	$ 400,000
Less: Interest	$ 125,000
EBT	$ 275,000
Less: Tax 40%	$ 110,000
EAT	$ 165,000
EPS	$ 1.65

Degree of operating leverage (DOL):

Degree of financial leverage (DFL):

Degree of total leverage:

Effect on EPS :

That means when there is a 5% increase in sales, there will be 10.91% increase in EPS.

jeff jeffy answered 2 years ago

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