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Use the following information below to answer the following questions: Average selling price per unit $12
Use the following information below to answer the following questions:
Average selling price per unit $12.00
Variable cost per unit $7.00
Units sold 200,000
Fixed costs $220,000
Interest expense $75,000
Calculate the degree of operating leverage and financial leverage
Expert Solution
Computation of the degree of operating leverage:-
Contribution margin = (Selling price per unit - Variable cost per unit) * Number of units sold
= ($12 - $7) * 200,000
= $5 * 200,000
= $1,000,000
EBIT = Contribution margin - Fixed cost
= $1,000,000 - $220,000
= $780,000
EBT = EBIT - Interest expense
= $780,000 - 75,000
= $705,000
Degree of operating leverage = Contribution margin / EBIT
= $1,000,000 / $780,000
= 1.28
Computation of the degree of financial leverage:-
Degree of financial leverage = EBIT / EBT
= $780,000 / $705,000
= 1.11
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