Umbrella Company has a degree of total leverage of 4.0. This means that a:
A) 1 percent change in operating earnings will result in a 4.0 percent change in net income.
B) 1 percent change in units produced and sold will result in a 4.0 percent change in net income.
C) 1 percent change in units produced and sold will result in a 4.0 percent change in earnings per share.
D) 1 percent change in units produced and sold will result in a 4.0 percent change in operating earnings.

Question

Quizplus · Accepted Answer

The degree of total leverage indicates how a change in sales volume affects net income, so a 1% change in units produced and sold results in a 4.0% change in net income.

Umbrella Company Has a Degree of Total Leverage of 4