Problem
Break-even, Financial and Operating Leverages
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Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
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Sales (40,000 bags at $50 each)
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$2,000,000
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Less: Variable costs (40,000 bags at $25)
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1,000,000
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Fixed costs
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600,000
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Earnings before interest and taxes
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400,000
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Interest expense
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120,000
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Earnings before taxes
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280,000
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Income tax expense (20%)
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56,000
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Net income
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$ 224,000
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Based on the information above, calculate (show all calculations and responses in good form):
o Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?
o What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
o What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.