Question about Leverage and risk
X Company produces inflatable beach balls, selling 400,000 balls a year. Each ball produced has a variable operating cost of $0.84 and sells for $1.00. Fixed operating costs are $28,000. The firm has annual interest charges of $6,0000, preferred dividends of $2,000, and a 40% tax rate.
a) Calculate the operating breakeven point in units.
b) Use the degree of operating leverage (DOL) formula to calculate DOL
c) Use the degree of financial leverage (DFL) formula to calculate DFL.
d) Use the degree of total leverage (DTL) formula to calculate DTL.
Compare this to the product of DOL and DFL calculated in parts b and c.