In other words the base level of sales must be held

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Unformatted text preview: t levels of fixed costs. 520 PART 4 Long-Term Financial Decisions Whenever the percentage change in EPS resulting from a given percentage change in sales is greater than the percentage change in sales, total leverage exists. This means that as long as the DTL is greater than 1, there is total leverage. EXAMPLE Applying Equation 12.8 to the data in Table 12.7 yields DTL 300% 50% 6.0 Because this result is greater than 1, total leverage exists. The higher the value, the greater the degree of total leverage. A more direct formula for calculating the degree of total leverage at a given base level of sales, Q, is given by Equation 12.9,12 which uses the same notation that was presented earlier: Q DTL at base sales level Q Q EXAMPLE Substituting Q 20,000, P $12,000, and the tax rate (T (P VC) (P FC VC) I PD $5, VC $2, FC $10,000, I 0.40) into Equation 12.9 yields (12.9) 1 1 T $20,000, PD DTL at 20,000 units 20,000 20,000 $60,000 $10,000 ($5 $2) $10,000 ($5 $20,000 $2) $12,000 1 1 0.40 6.0 Clearl...
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This document was uploaded on 01/19/2014.

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