Finance 200

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11. The Sterling Tire Company’s income statement for 2008 is as follows:
Given this income statement, compute the following:

STERLING TIRE COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales (20,000 tires at $60 each) . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000
Less: Variable costs (20,000 tires at $30) . . . . . . . . . . . . . . . 600,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . 200,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,000


a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.

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