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 150,000 units at a price of $30 per unit; variable costs are $7 per unit, and fixed costs are $2,050,000. Interest expense is $425,000. What is the degree of combined leverage for this Japanese firm? (Round your answer to 2 decimal places.)

Answer 1

Answer:

combined degree: 3,5385

Explanation:

degree of operating leverage:

$\frac{contribution}{EBT}$

contribution: Q (sales - variable cost)

150,000 x (30 - 7) = 150,000 x 23 = 3,450,000

EBT =  contribution - fixed cost - interest expense

 3,450,000 - 2,050,000 - 425,000 = 975,000

$\frac{contribution}{EBT}$

$\frac{3,450,000}{975,000}$

combined degree: 3,5385