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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

01

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.

02

Degree of combined leverage

Degreeofcombinedleverage=ContributionEBT=$630,000-$262,500$105,000=3.5

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Most popular questions from this chapter

The Holtzman Corporation has assets of \(400,000, current liabilities of \)50,000, and long-term liabilities of \(100,000. There is \)40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $22,000 in earnings available to common stockholders and

Holtzman鈥檚 stock has a P/E of 18 times earnings per share, what is the current

price of the stock?

c. What is the ratio of market value per share to book value per share?

Boise Timber Co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are \(6,500,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is \)9. How many units does the firm need to sell to reach the cash break-even point?

Why is trend analysis helpful in analyzing ratios?

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder鈥檚 equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder鈥檚 equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.

Given the following information, prepare an income statement for Jonas Brothers Cough Drops.

Selling and administrative expenses

$328,000

Depreciation expenses

195,000

Sales

1,660,000

Interest expenses

129,000

Cost of goods sold

560,000

Taxes

171,000
See all solutions

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