Question

Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower–lender relationships. Assume the Mitaka Company has a sales volume of 132,000 units at a price of $27 per unit; variable costs are $6 per unit, and fixed costs are $1,870,000. Interest expense is $407,000.

Answer 1

Income statement for Mitaka company :-

Particulars	Amount
Sales	3,564,000
Less- Variable cost	792,000
Contribution	2,772,000
Less-Fixed cost	1,870,000
EBIT	902,000
Less- Interest expense	407,000
EBT	495,000

Operating Leverage = Contribution / EBIT = 2,772,000 / 902,000 = 3.0732

Financial leverage = EBIT / EBT = 902,000 / 495,000 = 1.8222

Combined leverage = Operating leverage* Financial leverage = 3.0732 * 1.8222 = 5.6