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iPad 7:40 PM 1 100% ezto.mheducation.com Apple Disney ESPN Yahoo! Best Buy E-Gift Cards from CashStar CatholcTV What Will Transfer 60 Dope Things...Delta CollegeHomepage-De... Chrome Web Br... Favorites Chp 05 Hom... Chp 05 Homework instructions help Question 5 (of 6) Save & Ext Submit 2.00 points Problem 5-10 Degree of leverage [LO5-2, 5-5) The Stering Tire Company\'s income statement for 20x1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (20.000 tires at $60 each) Variable costs (20,000 Sre30) Fixed costs Earnings before interest and taxes (EBIT Interest expense Earnings before taxes (EBT Income tax expense (30%) Earnings after taxes (EAT) $ 1.200,000 600,000 200,000 0,000 150,000 45,000 a. Compute the degree of operating leverage. (Round your answer to 2 decimal places Degree of operating b. Compute the degree of financial leverage. (Round your answer to 2 decimal places Degree of financial leverage G. Compute the degree of combined leverage. (Round your answer to 2 decimal places.) Degree of d. Compute the break-even point in units. (Round your answer to the nearest whole number.) point

Solution

a) Degree of operating leverage = Contribution/EBIT = (1200000-600000)/200000 = 3.00 b) Degree of financial leverage = 200000/150000 = 1.33 c) Degree of combined levrage = Contribution/EBT = 600000/150000 = 4.00 or alternatively, DCL = DOL*DFL = 3.00*1.33 = 4.00 d) BEP in units = Fixed costs/Contribution per unit = (400000+50000)/(60-30) = 15000 Units