Compute the degree of operating leverage

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Reference no: EM132943334

Fly Away Corporation makes pumps for the aviation industry. The income statement is shown below:

Fly Away Corporation Sales (7,000 pumps at $40) $280,000

Less: Variable costs (7,000 pumps at $15) $105,000

Fixed Costs $50,000 Earnings before interest and taxes (EBIT) $125,000

Interest $12,000.

Problem 1: Fly Away has a tax rate of 25%, and a preferred dividend of $6,000. Use the information from the income statement to compute the following:

1.1. Degree of operating leverage.
1.2. Degree of financial leverage.
1.3. Degree of combined leverage.
1.4. The break-even point.
1.5. Explain the difference between the two types of leverage.
1.6. Re-compute with the fixed costs increased to $60,000 and explain what happened to the break-even point.

Reference no: EM132943334

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