Hi!!
1. Degree of operating leverage.
Degree of operating leverage (DOL):
- It measures the EBIT's percentage change as a result of a change of
one percent in the level of output.
- It helps in measuring the business risk.
To compute it just use the following formula:
Degree of operating leverage = Sales revenue less total variable cost
divided by sales revenue less total cost:
DOL = (Sales-Variable Costs) / (Sales-Variable Costs-Fixed Costs)
For this problem:
DOL = ($500,000-$200,000) / ($500,000-$200,000-$150,000) =
= $300,000 / $150,000 =
= 2
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2. Degree of financial leverage.
The degree of financial leverage (DFL) is defined as the percentage
change in earnings per share [EPS] that results from a given
percentage change in earnings before interest and taxes (EBIT):
DFL = Percentage change in EPS divided by Percentage change in EBIT
The above equation can be worked to get the following equivalent one:
DFL = EBIT / (EBIT-I), where I is the interest expense.
For this problem:
DFL = $150,000 / ($150,000-$60,000) =
= $150,000 / $90,000 =
= 5/3 = 1.67
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3. Degree of combined leverage.
The degree of combined leverage is also known as degree of total leverage (DTL).
To compute it use the following formula:
DCL = DOL * DFL
For this problem:
DCL = 2 * 5/3 = 10/3 = 3.333
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4. Break-even point in units( numbers of skates).
Break-even point in Units = Fixed Costs / Contribution margin per unit
where:
Contribution margin per unit = (Revenues - Variable Costs) / Units sold =
= Price per unit - Variable cost per unit
In effect:
The break-even level of sales is the sales point at which EBIT = 0 ;
or in other words:
break-even point in units = level of sales necessary to cover operating costs.
At the break-even level of sales:
EBIT = Sales - Variable costs - Fixed costs = 0
then:
Sales - Variable costs = Fixed costs
If we call:
q = quantity sold;
p = price per unit;
v = variable cost per unit,
then
Revenues = q.p and Variable costs = q.v
We will have:
Revenues - Variable costs = q.p - q.v = q.(p - v)
Then for the break-even point is:
q.(p - v) = Fixed costs ==> q = Fixed costs / (p - v)
For this problem is:
Variable costs per unit = $20
Contribution margin per unit = Price per unit - Variable cost per unit =
= $50 - $20 =
= $30
Break-even point in Units = Fixed Costs / Contribution margin per unit =
= $150,000 / $30 =
= 5,000
The break even point in units is 5,000 skates.
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For references see:
"Operating and Financial Leverage" (Ms Powerpoint presentation):
http://wps.pearsoned.co.uk/wps/media/objects/1670/1710211/0273685988_ch16.ppt
"Introduction to Capital Structure":
http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page22.htm
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Search strategy:
I used my own knowledge to answer this question, to find the
references I used the following search terms in Google:
"financial leverage"
"operating leverage"
"combined leverage"
I hope that this helps you. Feel free to request for a clarification
if you need it.
Regards,
livioflores-ga |