Given the following financial data for Boston Technology, compute the firmâs degree of combined leverage.

Assume a marginal tax rate of 40%.

2010 2011

Sales $700,000 $760,000

Fixed costs 175,000 190,000

Variable costs 406,000 448,000

EBIT 119,000 122,000

Interest 42,000 46,000

Shares outstanding 100,000 102,000

For year 2010

Degree of combined leverage is 3.82

For year 2011

Degree of combined leverage is 4.11

Explanation:

Computing the degree of combined leverage of the firm with the formula stated below as:

Degree of combined leverage = Contribution margin / EBT

where

Contribution margin is computed as:

Contribution margin = Sales - Variable Cost

EBT (Earnings Before tax) is computed as:

EBT = EBIT - Interest

Now, computing the same by applying the formula:

For year 2010

Contribution margin = $700,000 - $406,000

= $294,000

EBT = $119,000 - $42,000

= $77,000

Degree of combined leverage = $294,000 / $77,000

= 3.82

For year 2011

Contribution margin = $760,000 - $448,000

= $312,000

EBT = $122,000 - $46,000

= $76,000

Degree of combined leverage = $312,000 / $76,000

= 4.11