Response:
For the year 2010
Degree of combined leverage equals 3.82
For the year 2011
Degree of combined leverage equals 4.11
Clarification:
The degree of combined leverage of the company is computed using the formula provided:
Degree of combined leverage = Contribution margin / EBT
Where
Contribution margin is calculated as:
Contribution margin = Sales - Variable Costs
EBT (Earnings before tax) is calculated as:
EBT = EBIT - Interest
Now, calculate accordingly using the formula:
For 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 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