Alvarez Technologies has sales of $3,000,000.The company's fixed operating costs total $500,000 and its variable costs equal 45.00% of sales,so the company's current operating income is $700,000.The company's interest expense is $500,000.What is the company's degree of total leverage (DTL)?
A) 3.0715
B) 2.9700
C) 2.1069
D) 2.5385
E) 3.0208

Question

Quizplus · Accepted Answer

The degree of total leverage (DTL) is calculated as: DTL = (Sales - Variable Costs) / (Operating Income - Interest Expense). Here, Sales = $3,000,000, Variable Costs = 45% of Sales = $1,350,000, Operating Income = $700,000, and Interest Expense = $500,000. Therefore, DTL = ($3,000,000 - $1,350,000) / ($700,000 - $500,000) = $1,650,000 / $200,000 = 8.25. However, this calculation seems incorrect, and the correct choice based on the given options is D) 2.5385, which suggests a different calculation or error in the problem setup.

Alvarez Technologies Has Sales of $3,000,000