Financial Management and Strategic Management · Financing Decisions - Leverages

Combined Leverage and Degree of Combined Leverage (DCL)

Updated 4 October 2026 · Fact-checked

Combined leverage measures how a change in sales changes EPS, by joining operating and financial leverage. DCL = DOL × DFL = Contribution ÷ (EBIT − Interest − Preference dividend ÷ (1 − t)). It tells you the percentage change in EPS for a 1% change in sales.

Understand Combined Leverage and Degree of Combined Leverage

A firm has fixed operating costs and fixed financing costs. Fixed operating costs make EBIT move more than sales. This is operating leverage. Fixed financing costs (interest, preference dividend) make EPS move more than EBIT. This is financial leverage.

Combined leverage joins the two. A small change in sales is magnified once at the EBIT level and again at the EPS level. The total magnification is the Degree of Combined Leverage (DCL).

So DCL = DOL × DFL. If DOL is 2 and DFL is 1.5, DCL is 3. A 10% rise in sales then gives about a 30% rise in EPS. A 10% fall in sales gives about a 30% fall. Leverage works both ways, so high DCL means high risk.

DCL is measured at one particular sales level. It changes when sales, fixed costs or interest change. Do not use it for large jumps without recomputing.

Operating leverage covers only sales to EBIT. Combined leverage covers sales all the way to EPS. That is the main difference the exam asks about.

Key rules to remember

Degree of Combined Leverage (definition): DCL = % change in EPS ÷ % change in Sales; Valid at a given base sales level. Use it to find the EPS change for a sales change.
DCL as product: DCL = DOL × DFL; Compute DOL and DFL separately first, then multiply.
Degree of Operating Leverage: DOL = Contribution ÷ EBIT; Contribution = Sales − Variable cost.
Degree of Financial Leverage: DFL = EBIT ÷ EBT = EBIT ÷ (EBIT − Interest); If preference shares exist, DFL = EBIT ÷ [EBIT − Interest − Preference dividend ÷ (1 − t)].
DCL direct formula: DCL = Contribution ÷ EBT; EBIT cancels out. With preference shares, use the tax-adjusted preference dividend in the denominator.
EPS: EPS = (EBIT − Interest − Tax − Preference dividend) ÷ Number of equity shares; Use this to verify the effect of a sales change.

How to solve Combined Leverage and Degree of Combined Leverage questions

Use this method for any DCL question. It also gives you the DOL and DFL marks if the question asks for them.

1Write the income statement down to EBT: Sales, Variable cost, Contribution, Fixed cost, EBIT, Interest, EBT.
2Compute DOL = Contribution ÷ EBIT.
3Compute DFL = EBIT ÷ EBT. If preference shares are given, adjust the denominator for the preference dividend grossed up for tax.
4Compute DCL = DOL × DFL. Cross-check with Contribution ÷ EBT.
5If asked for the effect of a sales change, multiply the % change in sales by DCL to get the % change in EPS.
6Interpret in one line: a 1% change in sales changes EPS by DCL%, in the same direction.
7If asked, verify by preparing the new income statement and computing EPS.

Quickest way: Contribution ÷ EBT shortcut

When to use it: Use when the question gives sales, variable cost, fixed cost and interest, and asks only for DCL or the EPS change.

MCQ: compute Contribution and EBT only. DCL = Contribution ÷ EBT. Skip DOL and DFL unless asked.
Estimate the EPS change as % sales change × DCL. Eliminate options that do not match.
Check direction: a sales fall means an EPS fall, and the size is multiplied.
Written answer: show the mini statement down to EBT, then both DOL and DFL, then DCL. This earns step marks for formula, working and interpretation.
State the final line clearly, for example: A 10% rise in sales will raise EPS by 30%.

Common mistakes in Combined Leverage and Degree of Combined Leverage

Using EBIT instead of EBT in the DCL denominator.
Students mix up the DOL and DCL denominators.
Fix: Remember: DOL uses EBIT, DCL uses EBT. Contribution is always the numerator.
Using Sales instead of Contribution as the numerator.
Variable cost is forgotten or students confuse it with the profit-volume ratio.
Fix: Always compute Contribution = Sales − Variable cost first.
Ignoring the preference dividend, or deducting it without tax adjustment.
Preference dividend is paid after tax, so it does not sit above EBT.
Fix: Divide the preference dividend by (1 − tax rate) before deducting it from EBIT in the denominator.
Adding DOL and DFL instead of multiplying.
Students treat the two effects as additive.
Fix: The two effects compound, so DCL = DOL × DFL.
Treating DCL as fixed for any sales level.
The result looks like a constant.
Fix: DCL is calculated for a given base. Recompute after fixed costs, interest or sales change substantially.
Writing only the number with no interpretation.
Students stop once the arithmetic is done.
Fix: Add one line saying what a given % change in sales does to EPS, and comment on risk.

Worked examples

Example 1

A firm has Sales ₹10,00,000, Variable cost ₹6,00,000, Fixed cost ₹2,00,000 and Interest ₹50,000. Calculate DOL, DFL and DCL. If sales rise by 10%, what is the percentage change in EPS?

Show the solution

Contribution = 10,00,000 − 6,00,000 = ₹4,00,000.
EBIT = 4,00,000 − 2,00,000 = ₹2,00,000.
EBT = 2,00,000 − 50,000 = ₹1,50,000.
DOL = 4,00,000 ÷ 2,00,000 = 2.
DFL = 2,00,000 ÷ 1,50,000 = 1.3333.
DCL = 2 × 1.3333 = 2.6667. Check: 4,00,000 ÷ 1,50,000 = 2.6667.
EPS change = 10% × 2.6667 = 26.67%.

Answer: DOL = 2, DFL = 1.33, DCL = 2.67. A 10% rise in sales raises EPS by about 26.67%.

Example 2

A company has Sales ₹20,00,000, Variable cost ₹12,00,000, Fixed cost ₹5,00,000, 10% Debentures of ₹10,00,000 and 8% Preference shares of ₹5,00,000. Tax rate is 25%. Calculate DCL.

Show the solution

Contribution = 20,00,000 − 12,00,000 = ₹8,00,000.
EBIT = 8,00,000 − 5,00,000 = ₹3,00,000.
Interest = 10% × 10,00,000 = ₹1,00,000.
Preference dividend = 8% × 5,00,000 = ₹40,000. Grossed up = 40,000 ÷ 0.75 = ₹53,333.
Denominator = 3,00,000 − 1,00,000 − 53,333 = ₹1,46,667.
DOL = 8,00,000 ÷ 3,00,000 = 2.6667.
DFL = 3,00,000 ÷ 1,46,667 = 2.0455.
DCL = 8,00,000 ÷ 1,46,667 = 5.4545. Check: 2.6667 × 2.0455 = 5.4545.

Answer: DCL ≈ 5.45. A 1% change in sales changes EPS by about 5.45%.

Exam tips

Show the statement down to EBT first. Examiners award marks for each correct line even if the final answer slips.
Check whether preference shares are given. If so, gross up the dividend by (1 − t). This is the most common trap.
Always interpret the answer in terms of EPS change and risk. Many questions ask for a comment.
For theory, be ready to state the difference: operating leverage links sales to EBIT, financial leverage links EBIT to EPS, combined leverage links sales to EPS.
In MCQs, use Contribution ÷ EBT directly and save time.

Practice questions from Financing Decisions - Leverages

Combined Leverage and Degree of Combined Leverage in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Combined Leverage and Degree of Combined Leverage: frequently asked questions

What is the combined leverage formula for CA Intermediate?

DCL = DOL × DFL, which equals Contribution ÷ EBT. With preference shares, EBT is replaced by EBIT − Interest − Preference dividend ÷ (1 − t). It shows the % change in EPS for a 1% change in sales.

What is the difference between operating leverage and combined leverage?

Operating leverage links a change in sales to a change in EBIT and depends on fixed operating costs. Combined leverage links a change in sales to a change in EPS and includes the effect of fixed financing costs too.

Can DCL be used for any change in sales?

It is calculated at one base level of sales. It works well for small changes. For large changes, fixed costs or interest may change, so recompute the income statement.

Does a high DCL mean the firm is bad?

Not necessarily. A high DCL means EPS is very sensitive to sales. It raises gains when sales grow and losses when sales fall, so it signals higher risk.