Question

If a company has a degree of operating leverage equal to 1.129 then a 5% increase in sales will result in a 22.58% increase in operating income. True/False

Answer 1

“FALSE”

-The above given statement is false. Degree of operating leverage measures how the net income will change in proportion to the changes in sales.

-Degree of operating Leverage is calculated as follows;

Degree of operating Leverage = Contribution / Net Operating Income

-Changes in Net Operating Income = Degree of Operating Leverage x Percentage changes in sales

= 1.129 x 5%

= 5.65%

-If the Degree of operating leverage is 1.129 and the percentage changes in sales is 5%, then the Net Income will increase only to the extent of 5.65% and not 22.58%

-Therefore, the above given statement is “FALSE”