ExpertEasy1 markMultiple Choice
CPA · Question 24 · Area I: Business Analysis
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?
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:
A.
3.5%
B.
10%
C.
13.5%
D.
35%
How to approach this question
Formula: % Change in EBIT = DOL × % Change in Sales.
Full Answer
D.35%✓ Correct
D
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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