Question

19. The Quiet Company sells dress shirts for men. They have variable costs per shirt of $5.00 and fixed costs of $500 per week. The company sells the ties for $20 each and sells 3,000 ties per year.

a. Calculate the degree of operating leverage for a 10% change in sales.

b. If the company is partially financed with debt and has annual interest cost of $1,000, what is the degree of financial leverage?

c. What is the degree of total, or combined, leverage?

Answer 1

	Income Statement
	Particulars	Qty	per Unit	Amount		If Sales reduce by 10%	% Change
	(A) Sales	3000	$          20	$        60,000		$                             54,000.0	10%
Less:	(B) Variable Cost		$            5	$        15,000		$                             13,500.0
	(C) Contribution (A)-(B)		$          15	$        45,000		$                                40,500
Less:	(D) Fixed Cost			$        26,000		$                                26,000
	($500/Week*52 Weeks)
	(E) Operating Income (or) EBIT			$        19,000		$                                14,500	24%
Less:	(F) Interest			$          1,000
	(G) Net Income			$        18,000
a	Degree of Operating Leverage		(C)/(E)	2.37
(or)	Operating Leverage	=		2.37
	(% Change in Operating Income / % Change in Sales)
b	Degree of Financial Leverage		(E)/(G)	1.06
c	Degree of Combined Leverage Leverage		(C)/(G)	2.50