Question

Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $325. Variable cost per unit $189 Units sold 375 Fixed costs $6,980 Interest expense $18,494 Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?

Answer 1

SALES = 325 X 375 = 121875

VARIABLE COST = 189 X 375 = 70875

FIXED COST = 6980

INTEREST EXPESNES = 18494

Degree of financial leverage = EBIT/(EBIT-INTEREST)

Degree of financial leverage =

(SALES - VARIABLE COST - FIXED COST)/(SALES - VARIABLE COST - FIXED COST-INTEREST)

Degree of financial leverage = (121875 - 70875 - 6980)/(121875 - 70875 - 6980 - 18494)

Degree of financial leverage = 44020 /25526 = 1.7245 [rounded to 4 decimals] OR = 1.72 [rounded to 2 decimals]

[[ Thumbs up please ]]