Calculate the degree of operating and combined leverage
Course:- Finance Basics
Reference No.:- EM1349799

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1. An analytical income statement for Detroit Heat Treating is shown below. It is based on an output (sales) level of 40,000 units.
Sales $480,000
Variable costs _2_8__0_,_0_0_0
Revenue before fixed costs $200,000
Fixed costs _1_2__0_,_0_0_0
EBIT $ 80,000
Interest expense __3__0_,_0_0_0
Earnings before taxes $ 50,000
Taxes __2_5__,_0_0_0
Net income $____2__5____,__0__0__0

a. Calculate the degree of operating leverage at this output level.
b. Calculate the degree of financial leverage at this level of EBIT.
c. Determine the combined leverage effect at this output level.

2. You are employed as a financial analyst for a single-product manufacturing firm. Your supervisor has made the following cost structure information available to you, all of which pertains to an output level of 1,600,000 units.
Return on operating assets = 15%
Operating asset turnover = 5 times
Operating assets = $3 million
Degree of operating leverage = 8 times
Your task is to find the break-even point in units of output for the firm.


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