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–lender 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

Contribution

$\begin{array}{rcl} Contribution & = & Quantity \times (Sales price per unit - Variable cost per unit) \\ = & 130, 000 \times ($ 30 - $ 10) \\ = & $ 2, 600, 000 \end{array}$

EBT

$\begin{array}{rcl} EBT & = & Contribution - Fixed cost - Interest \\ = & $ 2, 600, 000 - $ 1, 850, 000 - $ 405, 000 \\ = & $ 345, 000 \end{array}$

Degree of combined leverage

$\begin{array}{rcl} Degree of combined leverage & = & \frac{Contribution}{EBT} \\ = & \frac{$ 2, 600, 000}{$ 345, 000} \\ = & 7.54 \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

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

Cash	\)163,000
Accounts receivable	889,000
Inventory	411,000
New plant and equipment	520,000
Total assets	$1,983,000

Short Answer

Step by step solution

Contribution

EBT

Degree of combined leverage

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