Problem:
A Company manufactures skates. The company's income statement for 2004 is as follows:
The Company
Income Statement
For the Year Ended December 31, 2004
Sales (30,000 skates @ $25 each)...........................
$750,000
Less: Variable costs (30,000 skates at $7)............
210,000
Fixed costs..........................................................
270,000
Earnings before interest and taxes (EBIT).............
270,000
Interest expense......................................................
170,000
Earnings before taxes (EBT)...................................
100,000
Income tax expense (35%)......................................
35,000
Earnings after taxes (EAT).....................................
$65,000
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.