Degree of Total Leverage (DTL)

B

DTL = (S - VC)/(EBT - I)

= ($3,000,000 - $1,800,000)/($700,000 - $500,000)

= 6.

To calculate the degree of total leverage (DTL), we need to first calculate the degree of operating leverage (DOL) and the degree of financial leverage (DFL), and then multiply them together.

The degree of operating leverage (DOL) measures the sensitivity of operating income to changes in sales. It is calculated as the percentage change in operating income divided by the percentage change in sales.

DOL = (ΔOperating Income / Operating Income) / (ΔSales / Sales)

In this case, the company's current operating income is $700,000. Let's assume there is a 10% increase in sales. We can calculate the new operating income using the given information:

Operating Income = Sales - Variable Costs - Fixed Costs

Operating Income = $3,000,000 - (0.60 * $3,000,000) - $500,000 Operating Income = $3,000,000 - $1,800,000 - $500,000 Operating Income = $700,000

Now, let's calculate the percentage change in operating income:

ΔOperating Income = New Operating Income - Current Operating Income ΔOperating Income = $700,000 - $700,000 = $0

Percentage change in operating income = ΔOperating Income / Current Operating Income Percentage change in operating income = $0 / $700,000 = 0%

Similarly, let's calculate the percentage change in sales:

ΔSales = New Sales - Current Sales ΔSales = 10% * $3,000,000 = $300,000

Percentage change in sales = ΔSales / Current Sales Percentage change in sales = $300,000 / $3,000,000 = 10%

Now, let's calculate the degree of operating leverage (DOL):

DOL = (0% / $700,000) / (10% / $3,000,000) DOL = 0 / 0.1 DOL = 0

The degree of operating leverage (DOL) is 0, which implies that the operating income is not sensitive to changes in sales.

Next, we need to calculate the degree of financial leverage (DFL). The degree of financial leverage (DFL) measures the sensitivity of earnings per share (EPS) to changes in operating income. It is calculated as the percentage change in EPS divided by the percentage change in operating income.

DFL = (ΔEPS / EPS) / (ΔOperating Income / Operating Income)

In this case, the interest expense is $500,000. Let's assume there is a 10% increase in operating income. We can calculate the new EPS using the given information:

EPS = (Operating Income - Interest Expense) / Number of Shares

EPS = ($700,000 - $500,000) / Number of Shares

Since the number of shares is not provided, we cannot calculate the actual EPS. However, for the purpose of calculating the DFL, we can assume a constant number of shares, which cancels out in the calculation.