Degree of operating leverage-break-even point in units

Question

Problem: The Sterling Tire Company income statement for 2006 is as follows:

Sterling Tire Company
Income Statement

For the Year Ended December 31, 2006
Sales (20,000 tires at $60 each)                $1,200,000
Less: Variable costs (20,000 tires at $30)        600,000
Fixed costs                                                   400,000

Earnings before interest and taxes (EBIT) 200,000
Interest expense                                      50,000

Earnings before taxes (EBT)    150,000
Income tax expense (40%)      60,000
Earnings after taxes (EAT)     $ 90,000

Given this income statement, compute the following:

1.Degree of operating leverage.
2.Degree of financial leverage.
3.Degree of combined leverage.
4.Break-even point in units.