The Harding Company manufactures skates. The company\'s income statement for 201
ID: 2653227 • Letter: T
Question
The Harding Company manufactures skates. The company's income statement for 2010 is as follows:
Compute the degree of operating leverage. (Enter only numeric value rounded to 2 decimal places.)
Compute the degree of financial leverage. (Enter only numeric value rounded to 2 decimal places.)
Compute the degree of combined leverage. (Enter only numeric value rounded to 2 decimal places.)
Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.)
The Harding Company manufactures skates. The company's income statement for 2010 is as follows:
Explanation / Answer
(‘a) Degree of Operating Leverage (OL)
OL is an efficiency ratio which shows how well companies use their fixed operating cost ( excluding interest on loans) and variable cost to generate income.
OL= Total Contribution Margin/ Earnings before Interest and Tax
OL= (Sales- Variable Cost)/ Earnings before Interest and Tax
OL= (828800-358400)/34,400
OL= 470,400/34,400
OL= 2.35
(‘b) Degree of Financial Leverage (FL)
FL is related to capital structure of company. If shows how well company using their debt to increase the net income .
FL= EBIT/ EBT
FL= 200,400/ 134,400
FL= 1.49
(‘C ) Combined Leverage
CL= Contribution/ EBT or
CL= OL x FL
CL= 470,400 / 134,400
CL= 3.50
(‘d) Break Even Point ( units)
Break-even point is the point of sale where at which company making no profit and incurring no loss. It means sales revenue are just enough to recover the entire operating cost.
Sales price per unit (a)
74
Variable cost per unit (b)
32
Contribution margin per unit (a-b)
42
Fixed Operating cost ( c )
270,000
Interest Expense (d)
66,000
Total Fixed Cost( c+d)
336,000
Break Even Point ( units) –
Total Fixed Cost/ Contribution per unit
8000, (336000/$ 42)
Break Even Units
8000 units
Sales price per unit (a)
74
Variable cost per unit (b)
32
Contribution margin per unit (a-b)
42
Fixed Operating cost ( c )
270,000
Interest Expense (d)
66,000
Total Fixed Cost( c+d)
336,000
Break Even Point ( units) –
Total Fixed Cost/ Contribution per unit
8000, (336000/$ 42)
Break Even Units
8000 units
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