Question

PT Subitu Karya Busana makes a premium clothes that wholesales for $12.00.
Each cloth has variable operating costs of $7.00. Fixed operating costs are $100,000
per year. The firm pays $26,000 interest and preferred dividends of $14,000 per
year. At this point, the firm is selling 60,000 latches per year and is taxed at a
rate of 40%.

a) Calculate its EBIT and earnings available for common stock holder, based on
the firm’s current sales of 60,000 units per year and its interest and preferred
dividend costs,.
b) Calculate the firm’s degree of operating leverage (DOL).
c) Calculate the firm’s degree of financial leverage (DFL).
d) Calculate the firm’s degree of total leverage (DTL).
e) In the coming year, PT Subitu Karya Busana has entered into a contract to
produce and sell an additional 30,000. Predict and calculate the changes in
EBIT and earnings available for common stock holder using the previous
calculation.

Answer 1

Requirement a.
PT Subitu Karya Busana
Income Statement
		$
Sales	(60000 X 12)	720,000
Variable operating costs	(60000 X 7)	420,000
Contribution Margin	(720,000-420,000)	300,000
Fixed Operating Costs		100,000
EBIT		200,000
Interest		26,000
EBT		174,000
Taxes @ 40%	(174,000 x40%)	69,600
Net income		104,400
Preferred Dividend		14,000
Earnings available for common stockholders	90,400
Requirement b.
Degree of Operating Leverage (DOL)
= Contribution Margin/EBIT
= 300,000/200,000
= 1.50
Requirement c.
Degree of Financial Leverage (DFL)
= EBIT/EBT
= 200,000/174,000
= 1.15
Requirement d.
Degree of Total Leverage (DTL)
= DOL X DFL
= 1.50 X 1.15
= 1.73
Requirement e.
PT Subitu Karya Busana
Income Statement
		$
Sales	(90,000 X 12)	1,080,000
Variable operating costs	(90,000 X 7)	630,000
Contribution Margin	(1,080,000-630,000)	450,000
Fixed Operating Costs		100,000
EBIT		350,000
Interest		26,000
EBT		324,000
Taxes @ 40%	(324,000 x40%)	129,600
Net income		194,400
Preferred Dividend		14,000
Earnings available for common stockholders	180,400