Question

QUESTION 41

1. To find a firm's operating leverage factor at a given level of sales, you

   		divide the contribution margin by operating income.
   		divide the contribution margin by fixed expenses.
   		divide variable expenses by fixed expenses.
   		divide operating income by contribution margin.

Answer 1

Option A is correct.

DOL =	Contribution margin/
	Operating income
or
DOL =	% Change in operating income/
	% Change in sales

It can also be re written as

DOL = [Quantity x (Price – Variable Cost per Unit)] / Quantity x (Price – Variable Cost per Unit) – Fixed Operating Costs

1) The degree of operating leverage (DOL) is used to measure the extent of the change in operating income resulting from change in sales.

2) If company is having high fixed cost it will lead to high operating leverage. Company with more operating leverage leads to high degree of change when revenue changes.