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Chapter 2: 19BP (page 150)

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower鈥搇ender relationships. Assume the Mitaka Company has a sales volume of 130,000 units at a price of \(30 per unit; variable costs are \)10 per unit, and fixed costs are \(1,850,000. Interest expense is \)405,000. What is the degree of combined leverage for this Japanese firm?

Short Answer

Expert verified

The degree of combined leverage of the company is 7.54.

Step by step solution

01

Contribution

Contribution=Quantity脳Salespriceperunit-Variablecostperunit=130,000脳$30-$10=$2,600,000

02

EBT

EBT=Contribution-Fixedcost-Interest=$2,600,000-$1,850,000-$405,000=$345,000

03

Degree of combined leverage

Degreeofcombinedleverage=ContributionEBT=$2,600,000$345,000=7.54

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