A decrease in contractual managers' salaries will result in:
A) an increase in the degree of combined leverage
B) a decrease in the degree of combined leverage
C) no change in the degree of combined leverage
D) an increase in the degree of financial leverage

Question

Quizplus · Accepted Answer

The degree of combined leverage (DCL) is the measure of the sensitivity of a company's earnings per share (EPS) to changes in sales revenue. A decrease in contractual managers' salaries will not affect sales revenue, and therefore will not affect the DCL. It will, however, result in a decrease in fixed costs, which will decrease the financial leverage. Therefore, the correct choice is B.

A Decrease in Contractual Managers' Salaries Will Result In