Reading 37: Measures of Leverage

Question 1

Degree of Operating Leverage (DOL)

37.1

Measures of Leverage

Answer 1

Question 2

Percentage change in Operating Income

(for a given change in units; based on DOL)

37.2

Measures of Leverage

Answer 2

Q = number of units

P = price per unit

V = variable operating cost per unit

F = fixed operating cost

Therefore, P - V is the per unit contribution margin and Q(P-V) is the contribution margin.

Question 3

Degree of Financial Leverage (DFL)

37.3

Measures of Leverage

Answer 3

Question 4

Degree of Financial Leverage (DFL)

(including the fixed financial cost, C, and tax rate, t )

37.4

Measures of Leverage

Answer 4

DFL is not affected by tax rate (cancels out).

Question 5

Degree of Total Leverage (DTL)

(with costs)

37.5

Measures of Leverage

Answer 5

Question 6

Breakeven Point

37.7

Measures of Leverage

Answer 6

Formula is derived from:

PQ = VQ + F + C

(revenues = costs)

P = price per unit

Q = number of units produced and sold

F = fixed operating costs

C = fixed financial costs

Therefore,

PQ_BE = VQ_BE + F + C

and the brekeven number of units is:

Question 7

Operating Breakeven

37.x

Measures of Leverage

Answer 7

Question 8

Degree of Total Leverage (DTL)

37.6

Measures of Leverage

Answer 8