Question

Data set: 2015 2016 sales $780,000 $874,000 fixed costs 195,000 195,000 Variable costs 460,200 515,660 EBIT...

Data set:

2015 2016
sales $780,000 $874,000
fixed costs 195,000 195,000
Variable costs 460,200 515,660
EBIT 124,800 163,340
interest 46,800 46,800
EPS $0.42 $0.63

What is the DOL based upon 2015 sales?
What is the DTL based upon 2015 sales?

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Answer #1

Hi,

DOL(Degree of operating leverage) tells us how much EBIT of company has change in proportion to sales.

DOL = % change in EBIT/% Change in Sales

here % change in EBIT for 2015 to 2016 = 163340/124800-1 = 30.88%

% change in Sales = 874000/780000-1 = 12.05%

so DOL = 30.88%/12.05% = 2.56

DTL (Degree of total leverage) = DOL* % change in EPS/% change in EBIT

DOL = 2.56

% change in EBIT = 30.88%

% change in EPS = 0.63/0.42-1= 50%

So DOL = 2.56* 50/30.88 = 4.15

Thanks

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