Question

The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows:

HARDING COMPANY Income Statement For the year ended December 31, 20X1
Sales (10,500 skates at \(60 each)	\)630,000
Less: variable costs (10,500 tires at \(25)	262,500
Less: fixed cost	200,000
Earnings before interest and taxes (EBIT)	\)167,500
Interest expenses	62,500
Earning before taxes (EBT)	\(105,000
Income tax expenses (30%)	31,500
Earning after taxe (EAT)	\)73,500

Given this income statement, compute the following:

a. Degree of operating leverage.

Short answer

The degree of operating leverage is 2.19.

Step-by-step solution

Contribution

$\begin{array}{rcl}\mathrm{Contribution}& =& \mathrm{Sales}-\mathrm{Variable}\mathrm{cost}\\ & =& \$630,000-\$262,500\\ & =& \$367,500\end{array}$

Degree of operating leverage

$\begin{array}{rcl}\mathrm{Degree}\mathrm{of}\mathrm{operating}\mathrm{leverage}& =& \frac{\mathrm{Contribution}}{\mathrm{EBIT}}\\ & =& \frac{\$367,500}{\$167,500}\\ & =& 2.19\end{array}$