The Sterling Tire Company\'s income statement for 20X1 is as follows: STERLING T

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 (41,000 tires at $102 each) Variable costs (41,000 tires at $51) Fixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (30%) Earnings after taxes (EAT) $4,182,000 2,091,000 610,000 $1,481,000 60,500 $1,420,500 426,150 $ 994,350 a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) Degree of operating leverage

Explanation / Answer

1)

Degree of operating leverage = Q ( P -V) / Q ( P -V) - F

Degree of operating leverage = 41,000 ( 102 -51) / 41,000 ( 102 -51) - 610,000

Degree of operating leverage = 2,091,000 / 1,481,000

Degree of operating leverage = 1.41

2)

Degree of financial leverage = Q ( P -V) - F / Q ( P -V) - F - C

Degree of financial leverage = 41,000 ( 102 -51) - 610,000 / 41,000 ( 102 -51) - 610,000 - 60,500

Degree of financial leverage = 1,481,000 / 1,420,500

Degree of financial leverage = 1.04

3)

Degree of combined leverage = Q ( P -V) / Q ( P -V) - F - C

Degree of combined leverage = 41,000 ( 102 -51) / 41,000 ( 102 -51) - 610,000 - 60,500

Degree of combined leverage = 2,091,000 / 1,420,500

Degree of combined leverage = 1.47

d)

Break even point = ( F + C) / P - V

Break even point = ( 610,000 + 60,500) / 102 - 51

Break even point = 13,147

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