Question

1. 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?

Answer 1

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.