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26 September, 14:15

Globo-Chem Co. forecasts the following income statement for the next year: Income Statement For the Year Ended on December 31 Net sales $960,000 Less: Variable costs 532,000 Less: Fixed costs 151,000 EBIT, or NOI $277,000 Less: Interest 161,000 EBT $116,000 Less: Taxes 46,400 Net income $69,600 Globo-Chem Co. uses no preferred stock in its capital structure. Click on the following lines and calculate the degrees of operating, financial, and total leverage for Globo-Chem Co.

a. DOL = ___.

b. DFL = ___.

c. DTL = ___.

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Answers (1)
  1. 26 September, 14:40
    0
    a. 1.55

    b. 2.39

    c. 3.70

    Explanation:

    a. The computation of the degree of operating leverage is shown below:

    = (Sales - Variable costs) : (Sales - Variable costs - Fixed costs)

    = ($960,000 - $532,000) : ($960,000 - $532,000 - $151,000)

    = $428,000 : $277,000

    = 1.55

    The (Sales - Variable costs) = Contribution margin

    The (Sales - Variable costs - Fixed costs) = EBIT

    b. The computation of the degree of financial leverage is shown below:

    = (EBIT) : (EBIT - Interest expense)

    = ($277,000) : ($277,000 - $161,000)

    = ($277,000) : ($116,000)

    = 2.39

    c. The computation of the degree of total leverage is shown below:

    = Degree of operating leverage * degree of financial leverage

    = 1.55 * 2.39

    = 3.70
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