Answer:
For year 2010
Degree of combined leverage is 3.82
For year 2011
Degree of combined leverage is 4.11
Explanation:
Computing the degree of combined leverage of the firm with the formula stated below as:
Degree of combined leverage = Contribution margin / EBT
where
Contribution margin is computed as:
Contribution margin = Sales - Variable Cost
EBT (Earnings Before tax) is computed as:
EBT = EBIT - Interest
Now, computing the same by applying the formula:
For year 2010
Contribution margin = $700,000 - $406,000
= $294,000
EBT = $119,000 - $42,000
= $77,000
Degree of combined leverage = $294,000 / $77,000
= 3.82
For year 2011
Contribution margin = $760,000 - $448,000
= $312,000
EBT = $122,000 - $46,000
= $76,000
Degree of combined leverage = $312,000 / $76,000
= 4.11
