Question

Globo-Chem Co. forecasts the following income statement for the next year: Income Statement For the Year Ended on December 31 Net sales $960,000 Less: Variable costs 532,000 Less: Fixed costs 151,000 EBIT, or NOI $277,000 Less: Interest 161,000 EBT $116,000 Less: Taxes 46,400 Net income $69,600 Globo-Chem Co. uses no preferred stock in its capital structure. Click on the following lines and calculate the degrees of operating, financial, and total leverage for Globo-Chem Co.

a. DOL = ___.
b. DFL = ___.
c. DTL =___.

Answer 1

a. 1.55

b. 2.39

c. 3.70

Step-by-step explanation:

a. The computation of the degree of operating leverage is shown below:

= (Sales - Variable costs) ÷ (Sales - Variable costs - Fixed costs)

= ($960,000 - $532,000) ÷ ($960,000 - $532,000 - $151,000)

= $428,000 ÷ $277,000

= 1.55

The (Sales - Variable costs) = Contribution margin

The (Sales - Variable costs - Fixed costs) = EBIT

b. The computation of the degree of financial leverage is shown below:

= (EBIT) ÷ (EBIT - Interest expense)

= ($277,000) ÷ ($277,000 - $161,000)

= ($277,000) ÷ ($116,000)

= 2.39

c. The computation of the degree of total leverage is shown below:

= Degree of operating leverage × degree of financial leverage

= 1.55 × 2.39

= 3.70