Question

The degree of operating leverage (DOL) at any given sales volume, X, is useful as:

1) An easy way to perform a Monte Carlo Simulation (MCS) analysis.

2) A measure of risk that can be used in conjunction with a CVP model.

3) An alternative measure of the breakeven volume.

4) A way to estimate fixed costs for an upcoming period.

5) A measure of targeted profit, expressed on a pre-tax basis.

Answer 1

Ans - A measure of risk that can be used in conjunction with a CVP model (Option 2)

DOL or Degree of operating leverage is used to calculate the change in Operating income as a response to change in sales volume which similarly to CVP or Cost-volume-profit analysis which helps in decision making process .. DOL is calculated by dividing (% change in EBIT to % change in sales).or simply (Contribution margin to operating profit) on any level of output.

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