Meyer Appliance Company makes cooling fans. The firm's income statement is as follows: Sales (7,000 fans at $20) $140,000 Less: Variable costs (7,000 fans at $8. 56,000 Fixed operating costs. Earnings before interest and taxes (EBIT) 44,000 $ 40,000 Interest ( I) . 10,000 $ 30,000 Earnings before taxes (EBT). Taxes (T) . 6,000 $ 24,000 $ 6,000 Earnings after taxes (EAT) Preferred stock dividends (PD) Compute: a. The break-even point. b. Degree of operating leverage. c. Degree of financial leverage. d. Degree of total leverage.
Meyer Appliance Company makes cooling fans. The firm's income statement is as follows: Sales (7,000 fans at $20) $140,000 Less: Variable costs (7,000 fans at $8. 56,000 Fixed operating costs. Earnings before interest and taxes (EBIT) 44,000 $ 40,000 Interest ( I) . 10,000 $ 30,000 Earnings before taxes (EBT). Taxes (T) . 6,000 $ 24,000 $ 6,000 Earnings after taxes (EAT) Preferred stock dividends (PD) Compute: a. The break-even point. b. Degree of operating leverage. c. Degree of financial leverage. d. Degree of total leverage.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please, use these formulas that are in the image only.
Transcribed Image Text:1. Meyer Appliance Company makes cooling fans. The firm's income statement is as follows:
Sales (7,000 fans at $20)..
$140,000
Less: Variable costs (7,000 fans at $8)..
56,000
Fixed operating costs.
44,000
Earnings before interest and taxes (EBIT)
$ 40,000
Interest ( I)..
10,000
Earnings before taxes (EBT)
$ 30,000
Taxes (T).
6,000
Earnings after taxes (EAT).
$ 24,000
$ 6,000
Preferred stock dividends (PD)
Compute:
a. The break-even point.
b. Degree of operating leverage.
c. Degree of financial leverage.
d. Degree of total leverage.
Transcribed Image Text:Using these formulas:
1-Breakeven Point Formula:
FC
Q =p- vc
2-Degree of Operating Leverage (DOL):
Percentage change in EBIT
Percentage change in sales
DOL
3-The formula for calculating the degree of operating
leverage at a base sales level, Q, is the following:
eX (P – vc)
DOL(Q) = Qx (P –- vc) – FC
Q: the sales level. P: sale price. vc: variable operating costs per unit.
FC: fixed operating costs.
4-The Degree Of Financial Leverage (DFL):
Percentage change in EPS
Percentage change in EBIT
DFL
EBIT
DFL at base level EBIT =
EBIT - I - (PD x
5-degree of total leverage (DTL)
Percentage change in EPS
Percentage change in sales
DTL
ex (P – vc)
PD
DTL at Q units =
ex (P – vc) – FC – 1 –(2)
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