The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (38,000 tires at $96 each) $ 3,648,000 Variable costs (38,000 tires at $48) 1,824,000 Fixed costs 580,000 Earnings before interest and taxes (EBIT) $ 1,244,000 Interest expense 59,000 Earnings before taxes (EBT) $ 1,185,000 Income tax expense (30%) 355,500 Earnings after taxes (EAT) $ 829,500 a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.) c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.)
The Sterling Tire Company’s income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (38,000 tires at $96 each) $ 3,648,000 Variable costs (38,000 tires at $48) 1,824,000 Fixed costs 580,000 Earnings before interest and taxes (EBIT) $ 1,244,000 Interest expense 59,000 Earnings before taxes (EBT) $ 1,185,000 Income tax expense (30%) 355,500 Earnings after taxes (EAT) $ 829,500 a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.) b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.) c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The Sterling Tire Company’s income statement for 20X1 is as follows:
| STERLING TIRE COMPANY | ||
| Income Statement | ||
| For the Year Ended December 31, 20X1 | ||
| Sales (38,000 tires at $96 each) | $ | 3,648,000 |
| Variable costs (38,000 tires at $48) | 1,824,000 | |
| Fixed costs | 580,000 | |
| Earnings before interest and taxes (EBIT) | $ | 1,244,000 |
| Interest expense | 59,000 | |
| Earnings before taxes (EBT) | $ | 1,185,000 |
| Income tax expense (30%) | 355,500 | |
| Earnings after taxes (EAT) | $ | 829,500 |
a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.)
b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.)
c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.)
d. Compute the break-even point in units. (Round your answer to the nearest whole number.)
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