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

     

Compute the degree of operating leverage. (Round your answer to 2 decimal places.)

    

   

   

   

Compute the degree of combined leverage. (Round your answer to 2 decimal places.)

   

   

Compute the break-even point in units. (Round your answer to the nearest whole number.)

     

STERLING TIRE COMPANY

Income Statement

For the Year Ended December 31, 2013   Sales (20,000 tires at $60 each) $ 1,200,000      Variable costs (20,000 tires at $30) 600,000      Fixed costs 400,000      Earnings before interest and taxes (EBIT) $ 200,000      Interest expense 50,000      Earnings before taxes (EBT) $ 150,000      Income tax expense (30%) 45,000      Earnings after taxes (EAT) $   105,000   

Explanation / Answer

(a).Degreee of Operating leverage=Contribution/EBIT

=(1,200,000-600,000)/200,000

=3

(b).Degree of Financial leverage=EBIT/(EBIT-Interest-Preference dividend before tax)

=200,000/(200,000-50,000-0)

=1.33

(c)Degree of Combined leverage:-

=Degree of operating leverage*Degree of financial leverage or Contribution/EBT

=3*1.33 or 600,000/150,000

=4

(d).Break even point in units= Fixed cost/Contribution per unit

=400,000/Rs.30 per unit

=13,333 units

Contribution per unit=Sales price per unit -Variable cost per unit

=$60-$30

=$30 per unit

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.