Hello everyone,
I’ve been studying “Reading #34 - Measures of Leverage” of L1, and I encountered the following statements near the end of chapter of the curriculum and Schweser, respectively:
“The farther unit sales are from the breakeven point for high-leverage companies, the greater the magnifying effect of this leverage.”
“Leverage of either type magnifies the effects of change in sales on net income. The further a firm’s sales are from its breakeven level of sales, the greater the magnifying effects of leverage on net income.”
However, according to the formula of DTL (degree of total leverage):
DTL = Q(P - V) / [Q(P - V) - F - I],
the magnifying effect (I assume it to be the percentage change in net income that results from a percentage change in sales, which is basically DTL) must get lower as Q gets higher, mathematically.
This seems to contradict to the statements mentioned in the books. I wonder if I did anything wrong?
Thanks a lot.
