Compute degree of operating, financial and combined leverage

Reference no: EM1354588

The Sosa Company produces baseball gloves. The company's income statement for 2004 is as follows:
SOSA COMPANY
Income Statement
For the Year Ended December 31, 2004
Sales (20,000 gloves at $60 each) . . . . . . . . . . . . . . . . . . . . . . . $1,200,000
Less: Variable costs (20,000 gloves at $20) . . . . . . . . . . . . . . 400,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . . 200,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,000
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.

Reference no: EM1354588

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