Because 2.3 is derived by overstating the $64,000 contribution margin or the $28,000 of fixed costs.
Because 2.4 could be obtained only by overstating the contribution margin or the fixed costs.
Because 1.78 is the degree of operating leverage, not financial leverage.
The degree of financial leverage is the percentage change in earnings available to common shareholders that is associated with a given percentage change in net operating income. Operating income equals earnings before interest and taxes. The more financial leverage employed, the greater the degree of financial leverage, and the riskier the firm. Degree of financial leverage can be calculated as % Change in Net Income ÷ % Change in Operating Profit (EBIT). Or it can also be calculated as Operating Profit (EBIT) ÷ Operating Profit (EBIT) ? Interest (I). When there is preferred stock, the second formula is modified as given in the problem: EBIT ÷ EBIT ? I ? [P / (1 ? T)] Earnings before interest and taxes equal $36,000 [$400,000 sales ? ($.84 x 400,000 units) VC ? $28,000 FC]. Using the formula given in the problem, the calculation is as follows: = $36,000 ÷ [$36,000 ? $6,000 ? ($2,000 ÷ .6)] = $36,000 ÷ $26,667 = 1.35
|
The degree of financial leverage for Carlisle Company