Example applying equation 118 to the data in table

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Unformatted text preview: . 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 FC VC) 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 20,000 20,000 $60,000 $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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