Final answer:
The assertion that degree of operating leverage should only be computed when a company is profitable is false. Degree of operating leverage can be calculated in any financial state of a company, and it measures the sensitivity of operating income to changes in sales.
Step-by-step explanation:
The question relates to the concept of degree of operating leverage (DOL), which is a financial metric used in business to measure the sensitivity of a company's operating income to its changes in sales. The statement that the degree of operating leverage should be computed only over a profitable range of operations is false. Although it can provide more useful insights when calculated during periods when a company is profitable, the DOL can technically be computed for any range of operations, whether the company is experiencing losses or profits.
Understanding the degree of operating leverage helps businesses anticipate how their earnings before interest and taxes (EBIT) will change in response to a change in sales revenue. High operating leverage indicates that a relatively small change in sales can lead to a larger percentage change in operating income, while low operating leverage suggests that changes in sales have a more modest impact on operating income. When businesses operate at a loss, the DOL can still be valuable to analyze and predict how far they are from reaching the break-even point, and how future changes in sales could affect their financial situation.