The Sterling Tire Company\'s income statement for 20X1 is as follows STERLING TI

Question

The Sterling Tire Company's income statement for 20X1 is as follows STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (21,000 tires at $62 each) Variable costs (21,000 tires at $31) Fixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (20%) $ 1,302,000 651,000 410,000 $ 241,000 50,500 $ 190,500 38,100 $ 152,400 Earnings after taxes (EAT) 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. (Round your answer to the nearest whole number.) Break-even point units

Explanation / Answer

a) Degree of operating leverage (DOL) = Contribution / EBIT

Contribution = sales - variable cost = $1,302,000 - $651,000 = $651,000

DOL = $651,000 / $241,000 = 2.70

b) Degree of financial leverage (DFL) = EBIT / EBT = $241,000 / $190,500 = 1.27

c) Degree of combined leverage (DCL) = Contribution / EBT = $651,000 / $190,500 = 3.42

d) Break - even point = Fixed costs / (Selling price - Variable cost per unit) = $410,000 / ($62 - $31) = 13,226 units

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