Question 3

Use the information below to answer the following questions

Average selling price per unit $20.00

Variable cost per unit $12.00

Units sold units 500,000

Fixed costs $1,200,000

Interest expense $750,000

Preference dividend $420,000

Tax 30%

Required:

a)Compute the degree of operating leverage, the degree of financial leverage and the degree of combined leverage

b)If sales increase by 10%, what should happen (in terms of percentage change) to operating income (EBIT)?

c)If operating income increases by 10%, what should happen (in terms of percentage change) to EPS?

d)If sales increase by 10%, what should (in terms of percentage change) be the effect on EPS?