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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
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
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Please, use these formulas that are in the image only.
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: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.
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)
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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