Break-even, Financial and Operating Leverages

Johnson Products, Inc.

Income Statement

For the Year Ended December 31, 2018

Sales (40,000 bags at $50 each) .................................. $2,000,000

Less: Variable costs (40,000 bags at $25) ................ 1,000,000

Fixed costs .............................................................. 600,000

Earnings before interest and taxes .............................. 400,000

Interest expense ........................................................... 120,000

Earnings before taxes ................................................. 280,000

Income tax expense (20%) .......................................... 56,000

Net income .................................................................. $ 224,000

Based on the information above, calculate (show all calculations and responses in good

form):

a. Break-even in units (in dollars and units). Explain what your numbers mean. As a

manager, how would you use the numbers in financial planning?

b. What is the degree of financial leverage? Explain what your number mean. As a

manager, how would you use the numbers in financial planning?

c. What is the degree of operating leverage? Explain what your number mean. As a

manager, how would you use the numbers in financial planning?