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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.
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