The correct answer is: A. EBIT to a percentage change in quantity.
Degree of total leverage is a measure of how much a company’s earnings before interest and taxes (EBIT) will change in response to a change in sales. It is calculated by dividing the company’s EBIT by its sales. A higher degree of total leverage means that the company’s EBIT will be more sensitive to changes in sales.
Option A is the correct answer because it is the only option that measures the change in EBIT in response to a change in quantity. Option B measures the change in earnings per share (EPS) in response to a change in EBIT. Option C measures the change in EPS in response to a change in quantity. Option D measures the change in quantity in response to a change in EBIT.
Here is a more detailed explanation of each option:
- Option A: EBIT to a percentage change in quantity. This option is the correct answer because it is the only option that measures the change in EBIT in response to a change in quantity. The degree of total leverage is calculated by dividing the company’s EBIT by its sales. A higher degree of total leverage means that the company’s EBIT will be more sensitive to changes in sales. For example, if a company has a degree of total leverage of 2, then a 1% increase in sales will result in a 2% increase in EBIT.
- Option B: EPS to a percentage change in EBIT. This option is incorrect because it measures the change in EPS in response to a change in EBIT. The degree of total leverage does not measure the change in EPS. EPS is calculated by dividing the company’s net income by its number of shares outstanding. A higher EPS means that the company is earning more money per share.
- Option C: EPS to a percentage change in quantity. This option is incorrect because it measures the change in EPS in response to a change in quantity. The degree of total leverage does not measure the change in EPS. EPS is calculated by dividing the company’s net income by its number of shares outstanding. A higher EPS means that the company is earning more money per share.
- Option D: Quantity to a percentage change in EBIT. This option is incorrect because it measures the change in quantity in response to a change in EBIT. The degree of total leverage does not measure the change in quantity. The degree of total leverage is calculated by dividing the company’s EBIT by its sales. A higher degree of total leverage means that the company’s EBIT will be more sensitive to changes in sales.