FINANCE / TOTAL LEVERAGE
Combine operating fixed costs and interest expense into one earnings-sensitivity ratio.
METHOD / WORKED EXAMPLE
Combined leverage traces a sales change through operating fixed costs and then through fixed interest expense.
WORKED DEFAULT
At $1,000,000 revenue, $600,000 variable cost, $250,000 fixed operating cost, and $50,000 interest, contribution margin is $400,000, EBIT is $150,000, pre-tax earnings is $100,000, and DCL is 4.
READ THE RESULT
A DCL of 4 estimates a 4% pre-tax earnings change for a 1% sales change near the supplied sales level when cost behavior and interest remain fixed.
ASSUMPTIONS AND LIMITS
The result is a local sensitivity estimate around the entered activity level, not a forecast for large sales movements.
COMMON QUESTIONS
Yes, when both component ratios use the same operating level and definitions. This page calculates DCL directly and also displays DOL and DFL so you can cross-check the relationship.
The pre-tax earnings denominator becomes small as operating profit approaches interest expense. That makes the ratio large and unstable, so use it only as a local sensitivity indicator around a viable positive-earnings scenario.
This version stops at earnings before tax to keep the operating and financing relationship transparent. Tax rules can be nonlinear and jurisdiction-specific, so adding a flat tax rate would not necessarily improve the result.
RELATED TOOLS
Use boundary
The calculator divides contribution margin by earnings before tax and cross-checks that result as DOL multiplied by DFL.
DCL = contribution margin / (EBIT - interest) = DOL x DFL.