In other words the base level of sales must be held

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Unformatted text preview: and Total Leverage Total leverage reflects the combined impact of operating and financial leverage on the firm. High operating leverage and high financial leverage will cause total leverage to be high. The opposite will also be true. The relationship between operating leverage and financial leverage is multiplicative rather than additive. The relationship between the degree of total leverage (DTL) and the degrees of operating leverage (DOL) and financial leverage (DFL) is given by Equation 11.10. DTL EXAMPLE DOL DFL (11.10) Substituting the values calculated for DOL and DFL, shown on the right-hand side of Table 11.7, into Equation 11.10 yields DTL 1.2 5.0 6.0 The resulting degree of total leverage is the same value that we calculated directly in the preceding examples. Review Questions 11–1 What is meant by the term leverage? How are operating leverage, financial leverage, and total leverage related to the income statement? 11–2 What is the operating breakeven point? How do changes in fixed operating costs,...
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