Bvariable operating costs 2unit sales in units 480

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: changes of equal magnitude in the corresponding direction. At this point, it should be clear that whenever a firm has fixed costs—operating or financial—in its structure, total leverage will exist. Measuring the Degree of Total Leverage (DTL) degree of total leverage (DTL) The numerical measure of the firm’s total leverage. The degree of total leverage (DTL) is the numerical measure of the firm’s total leverage. It can be computed much as operating and financial leverage are computed. The following equation presents one approach for measuring DTL:8 Percentage change in EPS Percentage change in sales DTL (11.8) 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 11.8 to the data in Table 11.7 yields DTL 300% 50% 6.0 Because this result is greater than 1, total leverage exists. The higher the value, the greater the degree of total leverage...
View Full Document

This document was uploaded on 03/30/2014.

Ask a homework question - tutors are online