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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 (11,100 skates @ $72 each) $ 799,200 Variable costs (11,100 skates at $31) 344,100 Fixed costs 260,000 Earnings before interest and taxes (EBIT) $ 195,100 Interest expense 65,500 Earnings before taxes (EBT) $ 129,600 Income tax expense (30%) 38,880 Earnings after taxes (EAT) $ 90,720

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.)

c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.)

d. Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.)

Solutions

Expert Solution

Degree of Operating leverage = (Sales – variable costs)/EBIT

= (799200-344100)/195100

= 2.3326 times

i.e. 2.33 times

Degree of financial leverage = EBIT/EBT

= 195,100/129600

= 1.51 times

c. Degree of combined leverage = DOL*DFL

= 2.33*1.51

= 3.52 times

d. Break even point in units = Fixed costs/(Selling price per unit – variable cost per unit)

= 260,000/(72-31)

= 6341.46 skates

i.e. 6341 skates

jeff jeffy answered 2 years ago
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