Question

The degree of operating leverage has which of the following characteristics?

The closer the firm is operating to breakeven quantity, the smaller the DOL.


A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.

The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).

The DOL relates the change in net income to the change in net operating income. If the firm has no debt, the DOL will equal 1.

Answer 1

DOL = % change in EBIT / % change in sales.  

The closer the firm is operating to breakeven quantity, the smaller the DOL.

This statement is not true. If the fixed costs are already recovered, then an increase in sales would result in a large increase in EBIT. This is because the variable costs are low, and the fixed costs are already recovered

A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant.

This statement is true. An increase in revenue would produce the same % change in EBIT, whether the increase is due to higher output, or higher price.

The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume).​​​​​​​

This statement is true. DOL is not fixed for a firm, but changes at every level of quantity, price and volume

The DOL relates the change in net income to the change in net operating income. If the firm has no debt, the DOL will equal 1.

This statement is not true. It refers to degree of financial leverage (DFL), not DOL