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A more direct formula for calculating the degree of total leverage at a given
base level of sales, Q, is given by Equation 11.9, 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
I PD $5, VC $2, FC $10,000, I
0.40) into Equation 11.9 yields (11.9) 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 Clearly, the formula used in Equation 11.9 provides a more direct method for
calculating the degree of total leverage than the approach illustrated using Table
11.7 and Equation 11.8. 8. This approach is valid only when the same base level of sales is used to calculate and compare these values. In
other words, the base level of sales must be held constant if we are to compare the total leverage associated with different levels of fixed costs. 434 PART 4 Long-Term Financial Decisions The Relationship of Operating, Financial,...
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- Spring '14