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degree of operatng leverage

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February 13th, 2023

McFrugal, Inc. has expected sales of $20 million. Fixed operating costs are $2.5 million, and the variable cost ratio is 65 percent. McFrugal has outstanding a $12 million, 8 percent bank loan. The firm also has outstanding 1 million shares of common stock ($1 par value). McFrugal’s tax rate is 40 percent.

a. What is McFrugal’s degree of operatng leverage at a sales level of $20 million?
a. What is McFrugal’s current degree of financial leverage?
b. Forecast McFrugal’s EPS if sales drop to $15 million.

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