Question

calculate a companys total leverage given the following information:

• net income = $80,000
• revenue = $120,000
• variable costs = $25,000

options:

• 1.19
• 1.6
• 1.14
• cannot calculate without eps data

Explanation:

Step1: Recall Total Leverage Formula

Total Leverage (TL) = $\frac{\text{Contribution Margin}}{\text{Net Income}}$, where Contribution Margin = Revenue - Variable Costs.

Step2: Calculate Contribution Margin

Revenue = $120,000$, Variable Costs = $25,000$.
Contribution Margin = $120,000 - 25,000 = 95,000$.

Step3: Calculate Total Leverage

Net Income = $80,000$.
TL = $\frac{95,000}{80,000} \approx 1.19$.

Answer:

1.19