Question 4 (15 marks)

1. (Leverage Analysis) You have developed the following analytical income statement for the Hugo Boss Corporation. It represents the most recent year's operations, which ended yesterday.

Sales	$ 50,439,375
Variable costs	(25,137,000)
Revenue before fixed costs	$ 25,302,375
Fixed costs	(10,143,000)
EBIT	$ 15,159,375
Interest expense	(1,488,375)
Earnings before taxes	$ 13,671,000
Taxes at 50%	(6,835,500)
Net income	$ 6,835,500

Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions: (10 marks)

1. At this level of output, what is the degree of operating leverage?

2. What is the degree of financial leverage?

3. What is the degree of combined leverage?

4. What is the firm's break-even point in sales dollars?

5. If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase?