Quick Finance Tip – Total Leverage and Breakeven Point

Total Leverage is a combination of a company’s Degree of Operating and Financial Leverage (DOL and DFL respectively, where DTL is the Degree of Total Leverage). DTL is the change in net income over the change in number of units sold.

• Formula: DTL = DOL * DFL or
• Formula: CM / (CM – F – C); where CM = Contribution Margin which equals Quantity * (Price - Variable Operating Unit Cost); F = Fixed Operating Costs, and C = Fixed Financial Costs

 
Breakeven Point is the number of units produced and sold at which the company’s net income is zero.
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• Formula: Break Even Point = (F+C)/(P-V)
• Formula: Operating Break-Even Point = F / (P – V), excludes Fixed Financial Costs