FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Using these formulas:
1-Breakeven Point Formula:
FC
Q =
P – vc
2-Degree of Operating Leverage (DOL):
Percentage change in EBIT
Percentage change in sales
DOL
3-The formula for calculating the degree of operating
leverage at a base sales level, Q, is the following:
QX (P- vc)
QX (P– vc) – FC
Q: the sales level. P: sale price. vc: variable operating costs per unit.
DOL(Q) =
%3D
FC: fixed operating costs.
4-The Degree Of Financial Leverage (DFL):
Percentage change in EPS
Percentage change in EBIT
DFL
EBIT
DFL at base level EBIT -
EBIT - I- (PD x
5-degree of total leverage (DTL)
Percentage change in EPS
Percentage change in sales
DTL =
QX (P- vc)
PD
Q x (P – vc) – FC –-1-)
DTL at Q units =
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Transcribed Image Text:Using these formulas: 1-Breakeven Point Formula: FC Q = P – vc 2-Degree of Operating Leverage (DOL): Percentage change in EBIT Percentage change in sales DOL 3-The formula for calculating the degree of operating leverage at a base sales level, Q, is the following: QX (P- vc) QX (P– vc) – FC Q: the sales level. P: sale price. vc: variable operating costs per unit. DOL(Q) = %3D FC: fixed operating costs. 4-The Degree Of Financial Leverage (DFL): Percentage change in EPS Percentage change in EBIT DFL EBIT DFL at base level EBIT - EBIT - I- (PD x 5-degree of total leverage (DTL) Percentage change in EPS Percentage change in sales DTL = QX (P- vc) PD Q x (P – vc) – FC –-1-) DTL at Q units =
1. Meyer Appliance Company makes cooling fans. The firm's income statement is as follows:
Sales (7,000 fans at $20)..
Less: Variable costs (7,000 fans at $8).
.$140,000
56,000
Fixed operating costs.
44,000
Earnings before interest and taxes (EBIT).
Interest ( I .
$ 40,000
10,000
Earnings before taxes (EBT)
$ 30,000
Taxes (T).
6,000
Earnings after taxes (EAT).
$ 24,000
$ 6,000
Preferred stock dividends (PD)
Compute:
a. The break-even point.
b. Degree of operating leverage.
c. Degree of financial leverage.
d. Degree of total leverage.
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Transcribed Image Text:1. Meyer Appliance Company makes cooling fans. The firm's income statement is as follows: Sales (7,000 fans at $20).. Less: Variable costs (7,000 fans at $8). .$140,000 56,000 Fixed operating costs. 44,000 Earnings before interest and taxes (EBIT). Interest ( I . $ 40,000 10,000 Earnings before taxes (EBT) $ 30,000 Taxes (T). 6,000 Earnings after taxes (EAT). $ 24,000 $ 6,000 Preferred stock dividends (PD) Compute: a. The break-even point. b. Degree of operating leverage. c. Degree of financial leverage. d. Degree of total leverage.
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