Question: A company manufactures an item that it sells for $24.50 per unit. Variable costs are $ 1 6.00 per unit and total annual fixed costs are $700,000. In the fiscal year just completed, 880,000 units were sold. The company has $ 1 2,000,000 of 1 3-percent long-term debt outstanding, no preferred shares, and 1,300,000 common shares. The firm's tax rate is 50 percent.
(a) Compute earnings before interest and taxes for the past year.
(b) Calculate earnings per common share.
(c) What is the degree of operating leverage, based on the volume for the year just completed?
(d) What is the degree of financial leverage?
(e) Calculate the combined or total leverage factor.
(f) How would an increase in the interest rate paid on outstanding debt affect the firm's leverage?