Friendly pie inc., income statement for 2017 is as follows: friendly pie, inc. income statement for the year ended december 31, 2017sales (160,000 units at $50) . . . . $8,000,000less: variable costs (160,000 units at $30) . 4,800,000fixed costs . . . . . . . . 1,600,000earnings before interest and taxes . . . . 1,600,000interest expense . . . . . . . . . . . 600,000earnings before taxes (ebt) . .. . . . 1,000,000income tax expense (30%) . . . . . .. 300,000earnings after taxes (eat) . . . . . . 700,000given this income statement, compute the following: a. degree of operating leverage. b. degree of financial leverage. c. degree of combined leverage. d. break even point in units and dollars.

a. Degree of operating leverage = Sales -Variable cost

                                                          Sales - Variable cost - Fixed cost

                                                     = $8,000,000 - $4,800,000

                                                        $8,000,000 - $4,800,000 - $1,600,000

                                                     = $3,200,000

                                                        $1,600,000

                                                     = 2

b. Degree of financial leverage

= Sales -Variable cost - Fixed cost

Sales - Variable cost - Fixed cost - Interest

= $8,000,000 - $4,800,000 - $1,600,000

  $8,000,000 - $4,800,000 - $1,600,000 - $600,000

= $1,600,000

   $1,000,000

= 1.6

c. Degree of combined leverage

   = Degree of operating leverage x Degree of financial leverage

   = 2 x 1.6

   = 3.2

d. Break-even point(units) = Fixed cost/Contribution per unit

                                  = $1,600,000/$20

                                  = 80,000 units

Contribution per unit = Selling price - Variable cost per unit

                                    = $50 - $30

                                    = $20

Break-even point (dollars) = Break-even point (units) x Selling price

                                             = 80,000 units x $50

                                             = $4,000,000

Explanation : Degree of operating leverage is equal to contribution divided by Earnings before interest and tax.

Degree of financial leverage is equal to earnings before interest and tax divided by earnings after interest

Degree of combined leverage is the product of degree of operating leverage and degree of financial leverage.

Break-even point(units) is equal to fixed cost divided by contribution per unit

Break-even point(dollars) is equal to break-even point in units multiplied by selling price.

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