Question

he degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt, then what is its degree of operating leverage?

Answer 1

Answer: 5

Explanation:

The measure used to evaluate a change in company 's operating income as a result of relative change in sales is called degree of operating leverage of the company. The operating leverage has two components that is fixed cost and variable cost.

.

Operating income of a company is denoted as EBIT, that is, earnings before interest and tax.

.

FORMULA =
`(percentage\ change\ in\ EBIT)/(percentage\ change\ in\ sales)`

=
`(50)/(10)` = 5

note :-

percentage change in EBIT =
`(1.5-1)/(1)`= 50%