Answer:
a. Degree of operating leverage = Sales -Variable cost
Sales - Variable cost - Fixed cost
= $8,000,000 - $4,800,000
$8,000,000 - $4,800,000 - $1,600,000
= $3,200,000
$1,600,000
= 2
b. Degree of financial leverage
= Sales -Variable cost - Fixed cost
Sales - Variable cost - Fixed cost - Interest
= $8,000,000 - $4,800,000 - $1,600,000
$8,000,000 - $4,800,000 - $1,600,000 - $600,000
= $1,600,000
$1,000,000
= 1.6
c. Degree of combined leverage
= Degree of operating leverage x Degree of financial leverage
= 2 x 1.6
= 3.2
d. Break-even point(units) = Fixed cost/Contribution per unit
= $1,600,000/$20
= 80,000 units
Contribution per unit = Selling price - Variable cost per unit
= $50 - $30
= $20
Break-even point (dollars) = Break-even point (units) x Selling price
= 80,000 units x $50
= $4,000,000
Explanation : Degree of operating leverage is equal to contribution divided by Earnings before interest and tax.
Degree of financial leverage is equal to earnings before interest and tax divided by earnings after interest
Degree of combined leverage is the product of degree of operating leverage and degree of financial leverage.
Break-even point(units) is equal to fixed cost divided by contribution per unit
Break-even point(dollars) is equal to break-even point in units multiplied by selling price.
