The Harding Company manufactures skates. The company's income statement for 2014 is as follows: HARDING COMPANY Income
Question:
The Harding Company manufactures skates. The company's income statement for 2014 is as follows:
HARDING COMPANY
Income Statement
Year ended December 31, 2014
Sales ( 10,000 skates at $50) ........................................................... $500,000
Less: Variable costs ( 10,000 skates at $20) ................................ 200,000
Contribution margin ............................................................................ 300,000
Less: Fixed costs .....................................................................................150,000
Operating profit or (EBIT) ...................................................................150,000
Interest expense .................................................................................... .60,000
Earnings before taxes (EST) ................................................................. 90,000
Income tax expense (40%) ................................................................. 36,000
Earnings after taxes (EAT) ............................................................... $ 54,000
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage: Comment on the impact of a 30 percent increase in sales. Does financial or operating leverage have the greater impact?
d. Break-even point in skates.
e. Break-even point considering the interest expense as a fixed cost.
Step by Step Answer:
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta