A company has a Degree of Operating Leverage (DOL) of 3.5. If sales increase by 10%, what is the expected percentage increase in operating income?

Answer options:

3.5%

10%

13.5%

35%

How to approach this question

Formula: % Change in EBIT = DOL × % Change in Sales.

Full Answer

D.35%✓ Correct

The Degree of Operating Leverage measures the sensitivity of operating income to changes in sales. A DOL of 3.5 means that for every 1% change in sales, operating income changes by 3.5%. Therefore, a 10% increase in sales leads to a 35% increase in operating income.

Common mistakes

Adding the percentages instead of multiplying.

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