Praxis Corp. 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 127,000
EBIT, or NOI $301,000
Less: Interest 191,000
EBT $110,000
Less: Taxes 44,000
Net income $66,000

Praxis Corp. uses no preferred stock in its capital structure. Ccalculate the degrees of operating, financial, and total leverage for Praxis Corp.
a. DOL
b. DFL
c. DTL

a. 1.42

b) 2.74

c) 3.89

Explanation:

a) The Degree of Operating Leverage measures how much operating Income will change by if Sales change.

It is calculated with the formula,

= (Sales - Variable Costs) / (Sales - Variable Costs - fixed costs)

= (960,000 - 532,000) / (960,000 - 532,000 - 127,000)

= 1.42

b) The Degree of financial leverage measures how much Income will change due to a change in operating Income.

The formula is,

=Earnings before Interest and tax / Earnings before Interest and tax - Interest or just Earning before tax

= 301,000/110,000

= 2.74

c. Degree of Total Leverage is a measure of how sensitive the net income of a company is to a change in goods produced and/or sold.

It is calculated by multiplying DOL and DFL.

= 1.42 * 2.74

= 3.89

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a

explanation:

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