Question

Allied Biscuit Co. forecasts the following income statement for the next year:

Income Statement For the Year Ended on December 31

Net sales	$960,000
Less: Variable costs	532,000
Less: Fixed costs	167,000
EBIT, or NOI	$261,000
Less: Interest	141,000
EBT	$120,000
Less: Taxes	48,000
Net income	$72,000

Allied Biscuit Co. uses no preferred stock in its capital structure. Click on the following lines and calculate the degrees of operating, financial, and total leverage for Allied Biscuit Co.

DOL	1. A 1.39 B. 1.64 C. 1.44 D. 1.69 E 1.57
DFL	2. A 2.07 B.2.50 C 2.86 D 2.33 E 2.68 F 2.18 G 1.93
DTL	3 A 3.66 B 3.75 C 3.42 D 3.86 E 3.51 F 3.57 G 3.96

Answer 1

1. DOL is computed as shown below:

= ( Sales - variable cost ) / EBIT

= ( $ 960,000 - $ 532,000) / $ 261,000

= 1.64 Approximately

So, the correct answer is option B.

2. DFL is computed as follows:

= EBIT / EBT

= $ 261,000 / $ 120,000

= 2.18 Approximately

So, the correct answer is option F.

3. DTL is computed as follows:

= ( Sales - variable cost ) / EBT

= ( $ 960,000 - $ 532,000) / $ 120,000

= 3.57 Approximately

So, the correct answer is option F.

Feel free to ask in case of any query relating to this question