Question

If a company has sales of 13,060,000, fixed costs of 2,540,000, contribution margin of 5,350,000 and interest expense of 460,000, what is its degree of combined leverage? Put your answer to two decimal

Answer 1

The degree of combined leverage (DCL) for the company is 1.88, indicating how sensitive the company's earnings are to sales fluctuations, considering both operating and financial leverage.

Step-by-step explanation:

The degree of combined leverage (DCL) is a financial ratio that measures the sensitivity of a company's earnings per share (EPS) to changes in its sales revenue, taking into account both operating and financial leverage. To calculate the DCL, you need to know the company's contribution margin, fixed costs, and interest expense.

In this scenario, the company's sales are $13,060,000, the fixed costs are $2,540,000, the contribution margin is $5,350,000, and the interest expense is $460,000. The formula for calculating DCL is DCL = Contribution Margin / (Contribution Margin - Fixed Costs - Interest Expense).

Applying this formula, we have DCL = $5,350,000 / ($5,350,000 - $2,540,000 - $460,000). After performing the calculations, the DCL is found to be approximately 1.875, which when rounded to two decimal places, gives us a DCL of 1.88.