Question: a) Explain the term leverage and what is the difference between financial and operating leverage [ 3 Marks] b) The RAAS Companys income statement for
a) Explain the term leverage and what is the difference between financial and operating leverage [ 3 Marks]
b)
The RAAS Companys income statement for 2020 is as follows: [ 5 Marks]
| STERLING RINGS COMPANY | |
| Income Statement | |
| For the Year Ended December 31, 2020 | |
| Sales (20,000 RINGS at $30 each).............................. | $600,000 |
| Less: Variable costs (20,000 tires at $10)................. | 200,000 |
| Fixed costs.............................................................. | 100,000 |
| Earnings before interest and taxes (EBIT).................. | ? |
| Interest expense........................................................... | 50,000 |
| Earnings before taxes (EBT)........................................ | ? |
| Income tax expense (18%)........................................... | ? ,000 |
| Earnings after taxes (EAT).......................................... | $ ? |
FILL IN THE MISSING AMOUNTS
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.
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