Question

What is DOL? why is it important?

Answer 1

DOL is Degree of Operating Leverage

DOL is % change in profit with respect to % change in sales.

It measure the operating risk in business.

DOL is calculated as Contribution / Operating profit {i.e. (sales - variable cost) / EBIT}

Higher the fixed cost higher the operating risk (higher the Degree of operating leverage)

Since fixed cost increases the operating risk since company needs to maintain contribution in order to recover its fixed cost.

Thus DOL is important to understand operating risk of the business.

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