Degree of operating leverage (DOL): It is the ratio of gross profit to net operating income. Calculate the degree of operating leverage as follows: Degree of operating leverage = Gross profit Net operating income Degree of financial leverage (DFL): It is the ratio of net operating income to earnings before tax. Calculate the degree of financial leverage as follows: Degree of financial leverage = Net operating income Earnings before tax Degree of total leverage (DTL): It is the ratio of gross profit to earnings before tax. Calculate the degree of total leverage as follows: Degree of total leverage = Gross profit Earnings before tax By using the income statement calculate the degree of operating leverage, degree of financial leverage and degree of total leverage.

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Chapter 12, Problem 10PROB

Summary Introduction

Degree of operating leverage (DOL):

It is the ratio of gross profit to net operating income.

Calculate the degree of operating leverage as follows:

Degree of operating leverage=Gross profitNet operating income

Degree of financial leverage (DFL):

It is the ratio of net operating income to earnings before tax.

Calculate the degree of financial leverage as follows:

Degree of financial leverage=Net operating incomeEarnings before tax

Degree of total leverage (DTL):

It is the ratio of gross profit to earnings before tax.

Calculate the degree of total leverage as follows:

Degree of total leverage=Gross profitEarnings before tax

By using the income statement calculate the degree of operating leverage, degree of financial leverage and degree of total leverage.

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