Degree of Total Leverage (DTL)
Degree of Total Leverage (DTL) ⇒ combines the degree of operating leverage and financial leverage. DTL measures the sensitivity of EPS to change in sales.
Degree of total leverage (DTL) incorporates both operating and financial leverage. Degree of total leverage expresses the degree to which a company uses fixed costs in its operations as well as the degree to which the company uses fixed rate financing in its capital structure. For a company with high fixed operating costs and high fixed financing costs, a small change in sales will bring about a large change in net income.
| Degree of Total Leverage (DTL) = | Degree of Financial Leverage × Degree of Operating Leverage |
In addition to multiplying DFL and DOL, degree of total leverage can also be calculated directly in two ways:
| Degree of Total Leverage (DTL) = | % [of future] Change in Net Income |
| % [of future] Change in Sales |
or
| Degree of Total Leverage (DTL) = | Contribution Margin |
| Earnings Before Taxes (EBT) |
| Degree of Total Leverage (DTL) = | Q (P-V) |
| Q (P-V) – F – I |
Q ⇒ quantity of unit sold
P ⇒ price per unit
V ⇒ variable cost per unit
F ⇒ fixed cost
I ⇒ interest
Multiplying we have :
| Degree of Total Leverage (DTL) = | S – TVC |
| S – TVC – F – I |
S ⇒ sales
TVC ⇒ total variable cost
F ⇒ fixed cost
I ⇒ interest