A company has $100 million in sales. Its variable and fixed operating costs are

Question

A company has $100 million in sales. Its variable and fixed operating costs are respectively measured by CGS of $45 million and SG&A; plus Depreciation of $38 million. The interest on its debt is $5 million and it has 10 thousand shares outstanding. The company pays a combined tax rate of 40% on its earnings. The degree of operating leverage (DOL) for the company is ______. Its degree of financial leverage (DFL) is ______. Combined, the degree of total leverage (DTL) for the company is ______.

Explanation / Answer

operating income = $100 - 45 - 38 million = $17 million DOL = (Sales - Variable cost)/ operating income =(100-45)/(100-45-38) = 3.235 Net income before tax = $17 - $5 = $12 million DFL = Operating Income/ Net income before tax = 17/12 = 1.417 DTL = DFL*DOL = 4.5833

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