10 Operating Gearing. Eden Enterprises expects to generate sales of £700,000 in the current financial year. An analysis of the firm’s operating cost structure has revealed that variable operating costs constitute 30 per cent of sales value and fixed operating costs are £310,000. The tax rate is 25 per cent.

The financial manager of Eden Enterprises has decided to explore the effect on earnings of possible changes in the company’s sales levels. She wishes to create two financial scenarios, one where sales revenue is 10 per cent more than expected and the second where sales revenue is 10 per cent less than expected.

You are required to produce a table clearly showing the effects of the financial scenarios on the company’s expected earnings and to calculate the company’s degree of operating gearing (DOG). Comment on your findings.
11 Total Gearing. Construct a table which sets out clearly the total gearing (combined financial and operating) position of Eden Enterprises based on the sales scenarios presented in Question 10 together with the relevant financial information from Question 9. Calculate the degree of total gearing (DTG) for Eden Enterprises and comment on your findings.