Problem: The Harding Company manufactures skates. The company's income statement for 2001 is as follows:
Harding Company
Income Statement
For the Year Ended December 31, 2001
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Sales (10,000 skates @ $50 each)...........................
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$500,000
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Less: Variable costs (10,000 skates at $20)..........
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200,000
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Fixed costs..........................................................
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150,000
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Earnings before interest and taxes (EBIT).............
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150,000
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Interest expense......................................................
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60,000
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Earnings before taxes (EBT)...................................
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90,000
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Income tax expense (40%)......................................
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36,000
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Earnings after taxes (EAT).....................................
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$ 54,000
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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 (number of skates).