The Harding Company manufactures skates. The company's income statement for 2014 is as follows: HARDING COMPANY Income

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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.

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Related Book For  book-img-for-question

Foundations of Financial Management

ISBN: 978-1259024979

10th Canadian edition

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

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