Determine sources of operating and financial leverage

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Reference no: EM1348008

1. You have developed the following income statement for the Hugo Bass Corporation. It represents the most recent year's operations, which ended yesterday.

Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:
a: What is the firm's break-even point in sales dollars?
b: If sales should increase by 30%, by what percent would earnings before taxes (and net income) increase?
c: Redo part (b) with a 10% reduction in variable cost and a $3000, increase in fixed cost.

Sales: $50,439,375
Variable Costs: (25,137,000)
Revenue before fixed costs: $25,302,375.
Fixed costs: (10,143,000)
EBIT 15,159,375
Interest expense: (1,488,375)
Earnings before taxes: 13,671,000.
Taxes at 50%: (6,835,500)
Net Income: 6,835,500.

2. High degrees of financial leverage and operating leverage each involve different types of risk. Risk of what?

3. What are sources of operating leverage and financial leverage and explain their impact on operating and net income?

Reference no: EM1348008

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