Question

Use the following information about Rat Race Home Security, Inc. to answer the questions:

Average selling price per unit $305.

Variable cost per unit $180

Units sold 435

Fixed costs $7,573

Interest expense $18,190

Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?

Answer 1

Contribution per unit = Average selling price per unit - Variable cost per unit = $305 - $180

Contribution per unit = $125

Total Contribution = Contribution per unit*No of units sold = $125*435

Total Contribution = $54,375

EBIT = Total Contribution - Fixed costs = $54,375 - $7,573

EBIT = $46,802

- Degree of Financial Leverage = EBIT/(EBIT - Interest Expenses)

Degree of Financial Leverage = $46,802/($46,802 - $18,190)

Degree of Financial Leverage = 1.6357 times

So, the degree of financial leverage of Rat Race Home Security, Inc is 1.6357 times

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