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Up2
Meta Corp. sells 15,000 units of its product at a price of $10 per unit. The company’s fixed costs are $12,000 and interest expense is $3,000. The variable cost per unit is $7, and the company’s EBIT is $15,000.
Meta Corp’s degrees of operating leverage and financial leverage are:
- Degree of operating leverage = 1.25, Degree of financial leverage = 1.36
- Degree of operating leverage = 1.36, Degree of financial leverage = 1.25
- Degree of operating leverage = 1.42, Degree of financial leverage = 1.19
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Up4
Woo! I got it right. 🙂
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Up4
Hi @rogersp188
So sorry for the mixup! We were in the middle of modifying the question.
Since EBIT is also generally = Revenue – Fixed Costs – Variable Costs, we wanted to make sure the EBIT number matched accordingly. Hence the question and answers have been modified slightly from @exam_whiz’s original version.
In our modified version:
EBIT
= Rev – FC – VC
= (15,000 x $10) – $12,000 – (15,000 x $7)
= $33,000The question should be fully fixed now. So sorry again for the mixup!
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Up3
Too bad the 300 hours practice question #38 correct answer choice is displayed as “(B) Degree of operating leverage = 1.36, Degree of financial leverage = 1.57 ✔” even though the Degree of financial leverage is clearly 1.25…
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Up3
as financial leverage= EBIT/(EBIT-Interest) and Operating Leverage=Sales-FC/ EBIT
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Up2
Financial Leverage = EBIT / EBIT – interest -> 15000/12000 = 1.25; Operating Leverage = Sales – TVC / Sales – TVC – FC = 150000 – 105000 / 150000 – 105000 – 12000 = 1.36
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Up2
That’s correct!
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