Firms in Japan often employ both high operating and financial leverage because o

ID: 2737238 • Letter: F

Question

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower–lender relationships. Assume the Mitaka Company has a sales volume of 126,000 units at a price of $26 per unit; variable costs are $6 per unit, and fixed costs are $1,810,000. Interest expense is $401,000.

What is the degree of combined leverage for this Japanese firm? (Round your answer to 2 decimal places.)

Explanation / Answer

Sales( 126000*26)

3,276,000

Less: variable Costs (126000*6)

756,000

Contribution (Sales-Variable costs)

2520,000

Less: Fixed Costs

18,10,000

Earnings before Interest

7,10,000

Less: Interest Cost

4,01,000

Net Income

3,09,000

Combined leverage = Operating leverage * Financial Leverage

Operating Leverage = Contribution/ Earning before Interest

Financial Leverage = Earning Before Interest/ Net Income

Or Combined Leverage = (2520000/710000) * (710000/309000)

Or Combined leverage = 8.155