Degree of leverage (LO2 and 5) The Silver Company’s income statement for 2021 is as follows:
| SILVER COMPANY | |
| Income Statement | |
| For the Year Ended December 31, 2021 | |
| Sales (20,000 tires at $60 each) | $1,200,000 |
| Less: Variable costs (20,000 tires at $30) | 600,000 |
| Fixed costs | 400,000 |
| Earnings before interest and taxes (EBIT) | 200,000 |
| Interest expense | 50,000 |
| Earnings before taxes (EBT) | 150,000 |
| Income tax expense (30%) | 45,000 |
| Earnings after taxes (EAT) | $105,000 |
Given this income statement, compute the following:
a. Degree of operating leverage.
Digree of operating leverage (DOL)= (x(x-xx))/(x(x-xx)-(xx))
DOL= xx, xxx($xx-$xx)/(xx, xxx($xx-$xx)-$ xxx, xxx)
= $xxx, xxx/$xxx, xxx
=3
b Degree of financial leverage.
Degree of financial leverage= (xxx (xxx))/(xxx(xxx)-xxx )
DFL= EBIT/(EBIT-I)
=$ xxx, xxx/($ xxx, xxx-$xx, xxx)
=x.x
c. Degree of combined leverage.
Degree of combined leverage (DCL)=(Q(quantity){P(price)-variable cost per unit (VC)})/({Q(price)-variable cost per unit (VC)}-fixed costs(FC)-Interest (I))
DCL=x(x- xx)/(Q(x- VC)-xx-I)
=xx,xxx($xx-$xx)/(xx,xxx($xx-$xx)-$xx,xxx-$xx,xxx)
= $xx,xxx/$xx,xxx
=x
d. Break-even point in units.
Break even point (BE)=(xxx)/(xxx-xxx)
BE=FC/(P-VC)=xxxx/($xx-$xx)=xx,xxx
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