This relationship holds for all types of leverage

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Unformatted text preview: tal sales in dollars—instead of unit sales—are available, the following equation, in which TR dollar level of base sales and TVC total variable operating costs in dollars, can be used. DOL at base dollar sales TR TR TVC TR TVC FC This formula is especially useful for finding the DOL for multiproduct firms. It should be clear that because in the case of a single-product firm, TR P Q and TVC VC Q, substitution of these values into Equation 11.5 results in the equation given here. CHAPTER 11 TABLE 11.5 429 Leverage and Capital Structure Operating Leverage and Increased Fixed Costs Case 2 Case 1 50% 50% Sales (in units) 500 1,000 1,500 Sales revenuea $15,000 $5,000 $10,000 Less: Variable operating costsb 2,250 4,500 6,750 Less: Fixed operating costs 3,000 3,000 3,000 $ 250 $ 2,500 $ 5,250 Earnings before interest and taxes (EBIT) 110% aSales 110% revenue was calculated as indicated in Table 11.4. operating costs $4.50/unit sales in units. bVariable mission basis. The effects of changes in fixed operating co...
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