11. The Sterling Tire Company’s income statement for 2008 is as follows:

Given this income statement, compute the following:

STERLING TIRE COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales (20,000 tires at $60 each) . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000
Less: Variable costs (20,000 tires at $30) . . . . . . . . . . . . . . . 600,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . 200,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,000

a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.

I need answer for testing idea

when you find the answer, please let me know.

answer

To compute the following for Sterling Tire Company, we will need to use the formulas associated with each calculation. Here's how you can find the answers:

a. Degree of operating leverage:
The degree of operating leverage (DOL) measures the sensitivity of the company's earnings before interest and taxes (EBIT) to changes in sales. It can be calculated using the following formula:

DOL = % change in EBIT / % change in sales

To compute this, we need the EBIT values at two different sales levels. Let's assume the previous year's sales were $1,000,000, and EBIT was $150,000. Substituting the values into the formula:

DOL = ($200,000 - $150,000) / ($1,200,000 - $1,000,000)
DOL = $50,000 / $200,000
DOL = 0.25

Therefore, the degree of operating leverage is 0.25.

b. Degree of financial leverage:
The degree of financial leverage (DFL) measures the sensitivity of the company's earnings after taxes (EAT) to changes in earnings before taxes (EBT). It can be calculated using the following formula:

DFL = % change in EAT / % change in EBT

To compute this, we need the EAT values at two different EBT levels. Let's assume the previous year's EBT was $120,000, and EAT was $90,000. Substituting the values into the formula:

DFL = ($105,000 - $90,000) / ($150,000 - $120,000)
DFL = $15,000 / $30,000
DFL = 0.5

Therefore, the degree of financial leverage is 0.5.

c. Degree of combined leverage:
The degree of combined leverage (DCL) measures the sensitivity of the company's earnings after taxes (EAT) to changes in sales. It can be calculated by multiplying the degree of operating leverage (DOL) by the degree of financial leverage (DFL):

DCL = DOL * DFL
DCL = 0.25 * 0.5
DCL = 0.125

Therefore, the degree of combined leverage is 0.125.

d. Break-even point in units:
To find the break-even point in units, we need to determine the sales volume at which the company's EBIT becomes zero. The break-even point can be calculated using the following formula:

Break-even point (in units) = Fixed costs / (Selling price per unit - Variable cost per unit)

Substituting the given values into the formula:

Break-even point (in units) = $400,000 / ($60 - $30)
Break-even point (in units) = $400,000 / $30
Break-even point (in units) = 13,333.33

Therefore, the break-even point in units is approximately 13,333 units.

answer