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

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Foundations Of Financial Management

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

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 11BP_c (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:
c. Degree of combined leverage.

Short Answer

Expert verified

The degree of combined leverage is 3.5.

Step by step solution

Interest expenses

Interest expense means the finance cost charged on the company鈥檚 borrowing. It is treated as an indirect expense in the income statement of the company.

Degree of combined leverage

$\begin{array}{rcl} Degree of combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{($ 630, 000 - $ 262, 500)}{$ 105, 000} \\ = & 3.5 \end{array}$

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	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder鈥檚 equity	239,000	423,000

Retained earning	Bond payable
Accounts payable	Accrued wages payable
Prepaid expenses	Accounts receivable
Plant and equipment	Capital in excess of par
Inventory	Preferred stock
Common stock	Marketable security

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Short Answer

Step by step solution

Interest expenses

Degree of combined leverage

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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