The Harding Company manufactures skates. The company\'s income statement for 201

ID: 2630318 • Letter: T

Question

The Harding Company manufactures skates. The company's income statement for 2013 is as follows:

Sales (10,500 skates @ $60 each).....................$630,000

Less: Variable costs (10,500 skates at $25)....... 262,500

Fixed costs......................................................200,000

Earnings before interest and taxes (EBIT)............$167,500

Interest expense......................................................62,500

Earnings before taxes (EBT)...................................$105,000

Income tax expense (30%)........................................31,500

Earnings after taxes (EAT).........................................$73,500

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 (number of skates)

a. degree of operating leverage

DOL =ContributionMargin / EBIT

DOL = (630000 - 262500)/167500

DOL = 2.19

b. degree of financial leverage

DFL = EBIT/EBT

DFL = 167500/105000

DFL = 1.60

c. degree of combined leverage

DCL = DOL*DFL

DCL = 2.19*1.60

DCL = 3.50

d. break-even point in units (number of skates)

Break-even point in units (number of skates) = Fixed Cost/Contribution Margin per unit

Break-even point in units (number of skates) = 200000/(60-25)

Break-even point in units (number of skates) = 5714.29

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