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Haunted Forest, Inc.is selling fog machines. Use the following information about Haunted Forest, Inc. to answer...

Haunted Forest, Inc.is selling fog machines. Use the following information about Haunted Forest, Inc. to answer the following questions. Average selling price per unit $313. Variable cost per unit $187 Units sold 305 Fixed costs $17,422 Interest expense $4,155 Based on the data above, what is the degree of total (combined) leverage of Haunted Forest, Inc.? Round the answer to two decimals

Solutions

Expert Solution

Financial Leverage = Contribution / EBIT

Operating Leverage = EBIT / EBT

Combined Leverage -

= Contribution / EBIT x EBIT / EBT

= Contribution / EBT (or Financial Leverage x Operating Leverage)

There is basic difference between leverage ratios and their degrees, if comparative figures of consecutive years are given in the question then degrees can be calculated for % change in the figures over the previous year. However, in the present problem only single set of figures are given, therefore, combined leverage or degree of combined leverage is one and the same. Calculation is presented as shown below -

Thus, Combined leverage is 2.28.

Formulas used in the above table are shown as below -

I hope this will help you in your task. Thank you.

jeff jeffy answered 1 year ago
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