11BP_a The Harding Company manufactures... [FREE SOLUTION]

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 11BP_a (page 147)

The Harding Company manufactures skates. The company鈥檚 income statement for 20X1 is as follows:
HARDING COMPANY
Income Statement
For the year ended December 31, 20X1
Sales (10,500 skates at $60 each)
$630,000
Less: variable costs (10,500 tires at $25)
262,500
Less: fixed cost
200,000
Earnings before interest and taxes (EBIT)
$167,500
Interest expenses
62,500
Earning before taxes (EBT)
$105,000
Income tax expenses (30%)
31,500
Earning after taxe (EAT)
$73,500
Given this income statement, compute the following:
a. Degree of operating leverage.

Expert verified

The degree of operating leverage is 2.19.

$\begin{array}{rcl} Contribution & = & Sales - Variable cost \\ = & $ 630, 000 - $ 262, 500 \\ = & $ 367, 500 \end{array}$

$\begin{array}{rcl} Degree of operating leverage & = & \frac{Contribution}{EBIT} \\ = & \frac{$ 367, 500}{$ 167, 500} \\ = & 2.19 \end{array}$

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HARDING COMPANY Income Statement For the year ended December 31, 20X1
Sales (10,500 skates at \(60 each)	\)630,000
Less: variable costs (10,500 tires at \(25)	262,500
Less: fixed cost	200,000
Earnings before interest and taxes (EBIT)	\)167,500
Interest expenses	62,500
Earning before taxes (EBT)	\(105,000
Income tax expenses (30%)	31,500
Earning after taxe (EAT)	\)73,500