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
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) = $33,000
The question should be fully fixed now. So sorry again for the mixup!
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…