The Sterling Tire Company’s income statement for 2013 is as follows: STERLING TI

Question

The Sterling Tire Company’s income statement for 2013 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2013 Sales (34,000 tires at $88 each) $ 2,992,000 Variable costs (34,000 tires at $44) 1,496,000 Fixed costs 540,000 Earnings before interest and taxes (EBIT) $ 956,000 Interest expense 57,000 Earnings before taxes (EBT) $ 899,000 Income tax expense (25%) 224,750 Earnings after taxes (EAT) $ 674,250 Given this income statement, compute the following: a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) Degree of operating leverage b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.) Degree of financial leverage c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.) Degree of combined leverage d. Compute the break-even point in units

Explanation / Answer

Degree of financial leverage = EBIT/(EBIT-Interest)

= 956000/(956000-57000)

= 1.06

Degree of operating leverage = Sales - Variable costs /(Sales - Variable costs - Fixed Costs)

= (2992000-1496000)/(2992000-1496000-540000)

= 1.56

Degree of combined leverage = 1.06*1.56 = 1.66

Break even points = Fixed costs/(selling price - Variable costs per unit)

= 540000/(88-44)

= 12273

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