Socrates Air is a low cost airline, primarily operating in Southern and Central Europe. Socrates Income Statement for this year is detailed below: Euro (millions) Sales: 89 (Cost of sales*: 45) Gross profit: 44 Staffing costs**: 12 S,G & A***: 11 Contribution 44 *Cost of sales is made up of the 20 million annual cost of leasing aircraft, through a ten year contract with no early exit option and the 25 million cost of aviation fuel, which is purchased on the open market as and when needed ** All staff are contractors, employed via “flexible” contracts and are only paid if their services are required by the airline *** S,G & A covers Sales, General and Admin costs, including head office, insurance and IT. Socrates does not vary spending in this area as sales fluctuate, as they believe they have optimised this element of their business model for any economic situation The corporate tax rate is 20% and this is not expected to change in the near future Socrates has total debt of 100 million Euros, with a fixed interest rate of 5%. This is not expected to change in the near future Requirements: i) Determine the degree of operating leverage for Socrates ii) Determine the degree of financial leverage for Socrates iii) Determine the degree of total leverage for Socrates iv) Socrates forecast a 5% decrease in sales next year. Assuming no change in unit costs, unit revenue, or tax rates, use your previous answer(s) to forecast net income next year. Comment on the relative change in net income to sales
Socrates Air is a low cost airline, primarily operating in Southern and Central Europe.
Socrates Income Statement for this year is detailed below:
Euro (millions)
Sales: 89
(Cost of sales*: 45)
Gross profit: 44
Staffing costs**: 12
S,G & A***: 11
Contribution 44
*Cost of sales is made up of the 20 million annual cost of leasing aircraft, through a ten year contract with no early exit option and the 25 million cost of aviation fuel, which is purchased on the open market as and when needed
** All staff are contractors, employed via “flexible” contracts and are only paid if their services are required by the airline
*** S,G & A covers Sales, General and Admin costs, including head office, insurance and IT. Socrates does not vary spending in this area as sales fluctuate, as they believe they have optimised this element of their business model for any economic situation
The corporate tax rate is 20% and this is not expected to change in the near future
Socrates has total debt of 100 million Euros, with a fixed interest rate of 5%. This is not expected to change in the near future
Requirements:
i) Determine the degree of operating leverage for Socrates
ii) Determine the degree of financial leverage for Socrates
iii) Determine the degree of total leverage for Socrates
iv) Socrates
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