Question

Calculate the degree of operating leverage, degree of financial leverage, and degree of total operating leverage given: 

Revenue grows from $200 to $230 

EBIT grows from $50 to $60 

NI grows from $20 to $28

Answer 1

% change in sales = (new sales - Existing sales)/Existing sales

(230-200)/200

=15%

% change in EBIT = (60-50)/50

=20%

% change in NI = (28-20)/2

=40%

Degree of Operating leverage= % change in EBIT/% change in sales

20%/15%

=1.3333

Degree of financial leverage = % change in net income/% change in EBIT

40%/20%

=2

Degree of total leverage = % change in net income/% change in sales

40%/15%

=2.6667

So degree of operating leverage is 1.3333

degree of financial leverage is 2

Total leverage is 2.6667