Answer:
See solutions below
Explanation:
1. The degree of combined leverage
= (Sales - Variable costs) / EBIT - Interest
Sales = $4.5 million
Variable costs = 0.45 × $4.5 million
= $2,025,000
EBIT = $4,500,000 - $2,025,000 - $1,000,000
= $1,475,000
Interest = 12% × $2,400,000
= $288,000
Therefore,
DCL = [$4,500,000 - $2,025,000] / $1,475,000 - $288,000
= $2,475,000 / $1,187,000
= 2.09
2. Gibson expected degree of leverage
Sales = 15% × $4.5 million
= $5,175,000
Fixed cost = $200,000 + $1,000,000
= $1,200,000
Variable cost = $0.42 × $2,025,000 - $2,025,000
= $2,025,000 - $850,500
= $1,174,500
EBIT = $5,175,000 - $1,174,500 - $1,200,000
= $2,800,500
Interest = $2,400,000 + $900,000
= 12% × $3,300,000
= $396,000
DCL = $5,175,000 - $1,174,500 / $2,800,500 - $396,000
= $4,000,500 / $2,404,500
= 1.66
