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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
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
EXAMPLE Substituting Q 20,000, P
$12,000, and the tax rate (T (P VC) (P
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
$10,000 ($5 $2) $10,000 ($5 $20,000 $2)
$12,000 1 1
0.40 6.0 Clearl...
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