Chapter 2: 10BP_c (page 147)

The Sterling Tire Company’s income statement for 20X1 is as follows:
STERLINE TIRE COMPANY
Income Statement
For the year ended December 31, 20X1
Sales (20,000 tires at $60 each)
$1,200,000
Less: variable costs (20,000 tires at $30)
600,000
Less: fixed cost
400,000
Earnings before interest and taxes (EBIT)
$200,000
Interest expenses
50,000
Earning before taxes (EBT)
$150,000
Income tax expenses (30%)
45,000
Earning after taxe (EAT)
$105,000
Given this income statement, compute the following:
c. Degree of combined leverage.

Short Answer

Expert verified

The degree of combined leverage is 4.

Step by step solution

Contribution

Contribution of the company is computed by deducting the variable cost from the sale value of the company.

Degree of combined leverage

$\begin{array}{rcl} Degree of combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{($ 1, 200, 000 - $ 600, 000)}{$ 150, 000} \\ = & 4 \end{array}$

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Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500

Short Answer

Step by step solution

Contribution

Degree of combined leverage

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STERLINE TIRE COMPANY Income Statement For the year ended December 31, 20X1
Sales (20,000 tires at \(60 each)	\)1,200,000
Less: variable costs (20,000 tires at \(30)	600,000
Less: fixed cost	400,000
Earnings before interest and taxes (EBIT)	\)200,000
Interest expenses	50,000
Earning before taxes (EBT)	\(150,000
Income tax expenses (30%)	45,000
Earning after taxe (EAT)	\)105,000