The Sosa Company produces baseball gloves. The companys income statement for 2004 is as follows Sosa o Income statement For the Year Ended December 31. 2004 Sales(20,000 gloves at $60 each) $1,200000 Less: Variable costs(20, 000 gloves at 400,000 Fixed costs 600.000 Earnings before interest and taxes (EBIt) 200,000 Interest expense Earnings before taxes(EBT) 120,000 ncome tax expense(30%) 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 Solution: Sosa company Q=20,000,P=$60,VC=$20,FC=$600,000,1=$80,000 . DOL Q(P-vC) Q(P-VC)-FC 20000(60-$20) 20.000(60-$20)-$60000 20.00040) 20.000(40)-60000 S-167 Copyright o by The McGraw-Hill Companies. InCopyright © 2005 by The McGraw-Hill Companies, Inc. S-167 5-8. 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. Solution: Sosa Company Q = 20,000, P = $60, VC = $20, FC = $600,000, I = $80,000 ( ) ( ) ( ) ( ) ( ) 20,000 ($40) $600,000 20,000 $40 20,000 $60 $20 $600,000 20 000 $60 $20 Q P VC FC Q P VC a. DOL − = − − − = − − − =