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:

c. Degree of combined leverage.

Short answer

The degree of combined leverage is 3.5.

Step-by-step solution

Interest expenses

Interest expense means the finance cost charged on the company’s borrowing. It is treated as an indirect expense in the income statement of the company.

Degree of combined leverage

$\begin{array}{rcl}\mathrm{Degree}\mathrm{of}\mathrm{combined}\mathrm{leverage}& =& \frac{\mathrm{Contribution}}{\mathrm{EBT}}\\ & =& \frac{\left(\$630,000-\$262,500\right)}{\$105,000}\\ & =& 3.5\end{array}$