Question

Sales are $60,000, EBIT = $4,000, NI = $2,000, DOL = 4.0x, and DFL = 1.5x. What will the company’s Net Income be if Sales are $66,000 rather than $60,000?

Answer 1

Degree of Operating Leverage = 4.00
Degree of Financial Leverage = 1.50

Degree of Combined Leverage = Degree of Operating Leverage * Degree of Financial Leverage
Degree of Combined Leverage = 4.00 * 1.50
Degree of Combined Leverage = 6.00

% Change in Sales = (New Sales - Old Sales) / Old Sales
% Change in Sales = ($66,000 - $60,000) / $60,000
% Change in Sales = 10%

Degree of Combined Leverage = % Change in Net Income / % Change in Sales
6.00 = % Change in Net Income / 10%
% Change in Net Income = 60%

New Net Income = Old Net Income * (1 + % Change in Net Income)
New Net Income = $2,000 * (1 + 0.60)
New Net Income = $3,200