Nike and Puma operate in the sports industry, for which the following pieces of information are...
- Nike and Puma operate in the sports industry, for which the following pieces of information are given in the table below.
|
Nike |
Puma |
|
|
Q (products sold) |
180,000 |
210,000 |
|
P (price per product) |
$22 |
$37 |
|
FC (fixed cost) |
$45,000 |
$50,000 |
|
VC (variable cost per product) |
$12 |
$23 |
|
EBIT |
$8,400,000 |
$6,200,000 |
|
I (interest expenses) |
$1,000,000 |
$1,750,000 |
Find the following:
- Degree of operating leverage for both companies, and explain your answers.
- Degree of financial leverage for both companies, and explain your answers.
- Degree of total leverage for both companies.
Which company has higher business risk, and financial risk?
Homework Answers
Calculation of degree of operating leverage (DOL)
DOL. = (Sales - Variable cost)/(Sales - Variable cost - fixed costs)
or. Contribution margin/EBIT
Contribution margin (Nike) = 180,000*(22 -12) = $1,800,000
EBIT (Nike) = 8,400,000
DOL. = 1800000/8400000 = 0.214
Calculation of DOL for Puma
DOL (puma) = 210000*(37 - 23)/6200000 =0.474
Calculation of degree of financial leverage
DFL = EBIT/EBT
DFL (Nike) = 8400000/8400000 -1,000,000
= 8,400,000/7,400,000 = 1.135
DFL (puma) = 6,200,000/6,200,000 - 1,750,000
= 6,200,000/4,450,000 =1.393
Calculation of degree of total leverage
DTL = DOL*DFL
DTL (Nike) = 0.214 * 1.135 = 0.243
DTL (puma) = 0.474 *1.393 =0.660
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