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The following information applies to questions 13 through 15. Solomon Company produces tires. The company's income...

The following information applies to questions 13 through 15. Solomon Company produces tires. The company's income statement for 2015 is as follows:

RIPKEN COMPANY, Income Statement

For the Year Ended December 31, 2015

Sales (25,000 gloves at $50 each) $1,250,000

Less Variable Costs (25,000 gloves at $20) 500,000

Fixed Costs 600,000

Earnings before Interest and Taxes (EBIT) 150,000

Interest Expense 80,000

Earnings Before Taxes (EBT) 70,000

Income Tax Expense (30%) 21,000

Earnings after Taxes (EAT) 49,000

13. What is the Degree of Operating Leverage?

14. What is the Degree of Financial Leverage?  

15. What is the Degree of Combined Leverage?

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Answer #1

13. What is the Degree of Operating Leverage?

Degree of operating leverage = (sales − variable costs) / (sales − variable costs − fixed costs)

= (1250000-500000)/​​​​​​​(1250000-500000-600000)

= 750000/150000

= 5

14. What is the Degree of Financial Leverage?  

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

= 150000/(150000-80000)

= 150000/70000

= 2.14

15. What is the Degree of Combined Leverage?

Degree of Combined Leverage = Degree of operating leverage *Degree of Financial Leverage

= 5*2.14

= 10.70

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