Problem: The Harmon Company manufactures skates. The company's income statement for 2004 is as follows:
Harmon Company
Income Statement
For the Year Ended December 31, 2004
Sales (30,000 skates @ $25 each) $750,000
Less: Variable costs (30,000 skates at $7) 210,000
Fixed costs 270,000
Earnings before interest and taxes (EBIT) 270,000
Interest expense 170,000
Earnings before taxes (EBT) 100,000
Income tax expense (35%) 35,000
Earnings after taxes (EAT)
$65,000
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.