Question

Following is Van Auken Lumber’s 2015 income statement.
Van Auken Lumber: Income Statement for December 31, 2015 ($ thousands)
Sales .................. $ 36,000
Cost of goods sold ............. (25,200)
Gross profit ............... $10,800
Fixed operating costs ........... (6,480)
Earnings before interest and taxes ...... $ 4,320
Interest ................. (2,880)
Earnings before taxes ............ $ 1,440
Taxes (40%) .............. (576)
Net income ............... $ 864
Dividends (50%) ............ $ 432
a. Compute the degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) for Van Auken Lumber.
b. Interpret the meaning of each of the numerical values you computed in part (a).
c. Briefly discuss some ways that Van Auken can reduce its degree of total leverage.



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  • CreatedNovember 24, 2014
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