The Sterling Tire Companys income statement for 20XX is as follows:

STERLING TIRE COMPANY

Income Statement

Year ended December 31, 20XX

Sales (20,000 tires at $80 each) $ 1,600,000

Less: Variable costs (20,000 tires at $55) 1,100,000

Contribution margin 500,000

Less: Fixed costs 300,000

Earnings before interest and taxes (EBIT) 200,000

Interest expense 75,000

Earnings before taxes (EBT) 125,000

Income tax expense (30%) 37,500

Earnings after taxes (EAT) $ 87,500

Given this income statement, compute the following:

a. Degree of operating leverage. (Round the final answer to 2 decimal places.)

DOL

X

b. Degree of financial leverage. (Round the final answer to 2 decimal places.)

DFL

X

c-1. Degree of combined leverage. (Do not round the intermediate calculations. Round the final answer to 2 decimal places.)

DCL

X

c-2. Using your answers to a. and b. calculate the percentage increase in EBIT and EBT from a 20 percent increase in sales volume. (Do not round the intermediate calculations. Round the final answers to 2 decimal places.)

EBIT

%

EBT

%

c-3. Does financial or operating leverage have the greater impact?

DOL

DFL

d. Break-even point in units. (Round the final answer to the nearest whole number.)

Break-even point

tires

e. Break-even point considering the interest expense as a fixed cost.

Break-even point

tires