The Harmon Company manufactures skates. The company's income statement for 2004 folle Harmon Company Income statement For the Year ended december 31. 2004 Sales(30,000 skates @$25 each $750,000 Less: Variable costs(30,000 skates at $7)..... 210.000 Fixed costs 270000 Earnings before interest and taxes (EBIt) 270.000 Interest expens 170.000 Earnings before taxes(EBT 100.000 Income tax expense(35%) 35.000 Earnings after taxes (EAT Given this income statement, compute the following a. Degree of operating leverage b. D of financial ley c. Degree of combined leverage d. Break-even point in units Solution: Harmon Company Q=30,000,P=$25,VC=$7,FC=$270,000,=$170,000 . DOL= Q(P-vC) Q(P-VC)-FC 30000(825-$7) 30000425-$7)-$270000 30000($18 30000618)-$270000 Copyright o by The McGraw-Hill Companies. InCopyright © 2005 by The McGraw-Hill Companies, Inc. S-169 5-9. The Harmon Company manufactures skates. The company's income statement for 2004 is as follows: Harmon Company Income Statement For the Year Ended December 31, 2004 Sales (30,000 skates @ $25 each)........................... $750,000 Less: Variable costs (30,000 skates at $7)............ 210,000 Fixed costs........................................................... 270,000 Earnings before interest and taxes (EBIT).............. 270,000 Interest expense....................................................... 170,000 Earnings before taxes (EBT)................................... 100,000 Income tax expense (35%)...................................... 35,000 Earnings after taxes (EAT)...................................... $65,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units. Solution: Harmon Company Q = 30,000, P = $25, VC = $7, FC = $270,000, I = $170,000 ( ) ( ) ( ) ( ) ( ) 30,000 ($18) $270,000 30,000 $18 30,000 $25 $7 $270,000 30 000 $25 $7 Q P VC FC Q P VC a. DOL − = − − − = − − − =