The percentage change in earnings before interest and tax (EBIT) associated with a given percentage change in sales is known as the _____.
A) degree of financial leverage
B) degree of total leverage
C) degree of operating leverage
D) degree of combined leverage
E) degree of contribution margin leverage

Question

Quizplus · Accepted Answer

The percentage change in EBIT associated with a given percentage change in sales is known as the degree of operating leverage. Choice A is incorrect because the degree of financial leverage measures the percentage change in earnings per share associated with a given percentage change in operating income. Choice B is incorrect because the degree of total leverage measures the percentage change in earnings per share associated with a given percentage change in sales. Choice D is incorrect because the degree of combined leverage measures the combined effect of operating and financial leverage on earnings per share. Choice E is incorrect because the degree of contribution margin leverage is not a commonly used financial term.

The Percentage Change in Earnings Before Interest and Tax (EBIT)