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Last year Arena Aviation's operating income (EBIT) increased by 22% while its dollar sales increased by...

Last year Arena Aviation's operating income (EBIT) increased by 22% while its dollar sales increased by 15%. What is Arena's degree of operating leverage?

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Answer #1

Operating leverage measures the effect of change in sales on the level of EBIT. The degree of operating leverage (DOL) indicates the effect of every 1% change in the company’s sales on the % change in EBIT.

% change in EBIT = 22%

% change in Sales = 15%

Degree of operating leverage = 1.4666

= 1.47 (approx)

The DOL indicates that every 1% change in the company’s sales will change the company’s operating income by 1.47 %

Hope it helps!

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