A firm has fixed costs of $13,000, variable costs of $15 and sale price per unit of $22. The firm has an interest expense of $800. The degree of financial leverage of the firm at an output level of 2,000 units is:
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A. B. C. D.Explanation
DFL = EBIT/(EBIT - I). Also, EBIT = Q(P-V) - FC. Therefore, EBIT = 2000*(22-15) - 13,000 = 1,000 and DFL = 1000/(1000 - 800) = 5.
To calculate the degree of financial leverage (DFL) for a firm, we need to use the following formula:
DFL = (Q × (P - VC) - FC) / (Q × (P - VC) - FC - I)
Where: Q = Quantity of units sold P = Sale price per unit VC = Variable cost per unit FC = Fixed costs I = Interest expense
In this case, the given information is as follows: Fixed costs (FC) = $13,000 Variable costs (VC) = $15 Sale price per unit (P) = $22 Interest expense (I) = $800 Quantity of units sold (Q) = 2,000
Now we can substitute these values into the formula to calculate the DFL:
DFL = (2,000 × ($22 - $15) - $13,000) / (2,000 × ($22 - $15) - $13,000 - $800) = (2,000 × $7 - $13,000) / (2,000 × $7 - $13,000 - $800) = ($14,000 - $13,000) / ($14,000 - $13,000 - $800) = $1,000 / ($14,000 - $13,800) = $1,000 / $200 = 5
Therefore, the degree of financial leverage (DFL) of the firm at an output level of 2,000 units is 5.
The correct answer is D. 5.0.