The Sterling Tire Company\'s income statement for 20X1 is as follows STERLING TI
ID: 2807738 • Letter: 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 (21,000 tires at $62 each) Variable costs (21,000 tires at S31) Fixed costs Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Income tax expense (20%) Earnings after taxes (EAT) $ 1,302,000 651,000 410,000 $ 241,000 50,500 $ 190,500 38,100 $ 152,400 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 unitsExplanation / Answer
Sterling Tire Company
Q = 21,000, P = $62, VC = $31, FC = $410,000, I= $50,500
a. DOL = Q(P - VC) / Q(P- VC) – FC
= 21,000($62-$31) / 21,000($62 - $31) - $410,000
= 21,000($31) / 21,000($31) - $410,000
= $651,000 / $651,000 - $410,000
= $651,000 / $241,000
= 2.70x
b. DFL = EBIT / EBIT – I
= $241,000 / $241,000 - $50,500
= $241,000 / $190,500
= 1.27x
c. DCL= Q(P - VC) / Q(P-VC)- FC-I
= 21,000($62 - $31)/ 21,000($62-$31)-$410,000-$50,500
= $651,000 / $651,000-$410,000-$50,500
= $651,000 / $190,500
= 3.42x
d. BE= $410,000 / $62 - $31
= $410,000 / $31
= 13,226 units
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