Leverage

Question 1

Calculate and explain (degree of) Operating Leverage

Answer 1

The degree of operating leverage (DOL) is defined as the percentage change in operating income (EBIT) that results from a given percentage change in sales:

Sales - Variable costs - Fixed costs

/

Sales - Variable costs

OR

% Change in EBIT (operating income)

/

% Change in Sales

Question 2

Calculate degree of financial leverage

Answer 2

EBIT (Sales - Variable costs)

/

EBIT - Interest Expense

OR

% Change in Net Income

/

% Change in EBIT

Question 3

Calculate and explain Degree of Total Leverage

Answer 3

DTL measures the sensitivity of EPS to a change in sales.

DTL = DOL x DFL

Question 4

Add a card on du pont here

Answer 4

Add a card on du pont here

Question 5

Calculate the breakeven quantity of sales

Answer 5

The breakeven quantity of sales is the quantity of sales for which revenues equal total costs, so that net income is zero.

Total fixed operating costs + Total fixed financing costs

/

Sales - Variable cost per unit

Question 6

add a card on calculating ROE ( may need to go back to FSA )

Answer 6

add a card on calculating ROE ( may need to go back to FSA )

Question 7

Explain Contribution Margin

Answer 7

Contribution margin is a measure of the amount of revenue left over after subtracting the variable costs associated with producing a product or service. This measure is used to determine how much of each sale contributes to covering fixed costs and ultimately to the profit of the business.

Question 8

Calculate the operating breakeven quantity of sales

Answer 8

fixed operating costs

/

price - variable cost per unit

Question 9

add card on how to calculate income for current period - do you have to have regard to previous period?