Question: You are supplied with the following analytical income statement for your firm. It reflects last year's operations.
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Sales
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$18,000,000
|
|
Variable costs
|
7,000,000
|
|
Revenue before fixed costs
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$11,000,000
|
|
Fixed costs
|
6,000,000
|
|
EBIT
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$ 5,000,000
|
|
Interest expense
|
1,750,000
|
|
Earnings before taxes
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$ 3,250,000
|
|
Taxes
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1,250,000
|
|
Net income
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$ 2,000,000
|
a. At this level of output, what is the degree of operating leverage?
b. What is the degree of financial leverage?
c. What is the degree of combined leverage?
d. If sales should increase by 15 percent, by what percent would earnings before taxes (and net income) increase?
e. What is your firm's break-even point in sales dollars?