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The Sterling Tire Company’s income statement for 20XX is as follows:    STERLING TIRE COMPANY Income Statement...

The Sterling Tire Company’s income statement for 20XX is as follows:

   STERLING TIRE COMPANY
Income Statement
Year ended December 31, 20XX
  Sales (35,000 tires at $50 each) $ 1,750,000
      Less: Variable costs (35,000 tires at $20) 700,000
  Contribution margin 1,050,000
      Less: Fixed costs 750,000
  Earnings before interest and taxes (EBIT) 300,000
  Interest expense 75,000
  Earnings before taxes (EBT) 225,000
  Income tax expense (30%) 67,500
  
  Earnings after taxes (EAT) $ 157,500

Given this income statement, compute the following:

a. Degree of operating leverage. (Round the final answer to 2 decimal places.)

DOL             X

b. Degree of financial leverage. (Round the final answer to 2 decimal places.)

DFL             X

c-1. Degree of combined leverage. (Do not round the intermediate calculations. Round the final answer to 2 decimal places.)

DCL             X

c-2. Using your answers to a. and b. calculate the percentage increase in EBIT and EBT from a 20 percent increase in sales volume. (Do not round the intermediate calculations. Round the final answers to 2 decimal places.)

  EBIT %
  EBT %

c-3. Does financial or operating leverage have the greater impact?

  • DOL

  • DFL

d. Break-even point in units. (Round the final answer to the nearest whole number.)

Break-even point             tires

e. Break-even point considering the interest expense as a fixed cost.

Break-even point             tires

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 2 years ago
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