Question: Following is Van Auken Lumber's annual income statement.
Van Auken Lumber: Income Statement for December 31, 20xx ($ thousands)
Sales $36,000
Cost of Goods Sold (25,200)
Gross Profit $10,800
Fixed Operating costs (6,480)
EBIT $4,320
Interests (2,880)
Earnings before taxes $1,440
Taxes (40%) (576)
Net Income $864
Dividends (50%) $432
Using this information, answer the following questions:
Q1. Compute the degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) for Van Auken Lumber.
Q2. Interpret the meaning of each of the numerical values you computed.
Q3. Briefly discuss some ways that Van Auken can reduce its degree of total leverage.
Q4. What is the breakeven point of the firm?
Q5. Discuss the ways to reduce financial risk and business risk of the firm.
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