Jayco, Inc., sells 10,000 units at a price of $5 per unit. Jayco’s fixed costs are $8,000,
interest expense is $2,000, variable costs are $3 per unit, and EBIT is $12,000. The
degree of operating leverage (DOL) and degree of financial leverage (DFL) are closest
to:
A. 2.50 DOL and 1.00 DFL.
B. 1.67 DOL and 2.00 DFL.
C. 1.67 DOL and 1.20 DFL.
Why isen’t net income 10k here? It is said to be 12k but that is the same as ebit…
Kaplan page 301 book 3 2024
EBIT is before interest and taxes:
= 10,000 * ( 5 - 3) - 8,000
= 12,000
You need to include the official answer along with the official reasoning.
Show the forum exactly what they said. You may have omitted information we need, you may have misinterpreted what they said, or they may have made a mistake. But you need to give us the information.
Yeah exactly so shouldn’t net income be 10k? Since ebit is 12k?
You’ve misinterpreted the formula.
DFL =\frac{\textrm{Percentage change in net income}}{\textrm{Percentage change in operating income}}
Notice the words Percentage change.
The formula is NOT \frac{\textrm{net income}}{\textrm{operating income}}
What happens when we sell 1 more unit?
Change in income is P-V where P is price per unit and V is variable cost per unit
Percentage change in net income =\frac{P-V}{\textrm{net income}}
Percentage change in operating income =\frac{P-V}{\textrm{operating income}}
DFL =\frac{\textrm{Percentage change in net income}}{\textrm{Percentage change in operating income}}=\frac{P-V}{\textrm{net income}}\times\frac{\textrm{operating income}}{P-V}
=\frac{\textrm{operating income}}{\textrm{net income}}
which resolves your issue.
I know that it is percentage change but my question is, why are they writing net income when ebit and net income is not the same? EBIT=12k and NI=10K
net income IS 10,000
Carefully read what I wrote above.
For this problem DFL =\frac{\textrm{operating income}}{\textrm{net income}}.
I’ve shown you why in my earlier answer above.
You seem to be using the INVERSE of that \frac{\textrm{net income}}{\textrm{operating income}}
That’s what you need to realize.
The official answer you supplied was DFL =\frac{12,000}{10,000}=1.2
If you use the correct formula, you have
\frac{\textrm{operating income}}{\textrm{net income}}=\frac{12,000}{10,000}.
so operating income =12,000 and net income=10,000 and your issue is resolved
You’ve use an incorrect formula and get (wrongly)
\frac{\textrm{net income}}{\textrm{operating income}}=\frac{12,000}{10,000} which leads you to wrongly believe that operating income =10,000 and net income=12,000
Have they written wrong in the book then?
No! That formula in the book is correct.
That’s my point.
The formula is Percentage change
Delta \Delta means change in and \%\Delta means percentage change in
In my first answer, I calculated what the changes were in net income and operating income if you sold one more unit, and what you find is that for this problem
DFL=\frac{\%\Delta \textrm{net income}}{\%\Delta \textrm{operating income}}
=\frac{\textrm{operating income}}{\textrm{net income}}
Yeah so what is the change then? We have to change in NI since we don’t know the previous years number so we can’t say that it changed from x to y since we only have the value of X.
Change doesn’t mean compared to last year.
They’re talking about what happens when you sell one more unit (marginal change).
That’s what I did in my first post.
If you sell one more unit, the fixed costs are unchanged, and income will increase by P-V.
Change in income is P-V where P is price per unit and V is variable cost per unit
Percentage change in net income =\frac{\textrm{change in net income}}{\textrm{net income}}=\frac{P-V}{\textrm{net income}}
Percentage change in operating income =\frac{\textrm{change in operating income}}{\textrm{operating income}}=\frac{P-V}{\textrm{operating income}}
DFL =\frac{\textrm{Percentage change in net income}}{\textrm{Percentage change in operating income}}=\frac{P-V}{\textrm{net income}}\times\frac{\textrm{operating income}}{P-V}
=\frac{\textrm{operating income}}{\textrm{net income}}
the same issue seems to have come up way back in 2013
Financial Leverage / Operating Leverage
@Wojtek sorted it out back then, and went through it step by step in the post that starts ``Tell me where you get lost in the following sequence:‘’
Increasingly I think there’s nothing new under the sun.
@Wojtek uses Q for the quantity sold and looks at how all these things change as you change Q.
Marginal change