Final answer:
A high Degree of Operating Leverage (DOL) indicates that a company has high fixed costs relative to its variable costs, which can lead to greater fluctuations in operating income with changes in sales volume. It does not directly indicate high labor costs or high debt levels.
Step-by-step explanation:
A high Degree of Operating Leverage (DOL) indicates that a company has high fixed costs in relation to its variable costs. The concept of DOL is particularly important in understanding how a firm's operating income will change in response to a change in sales. If a firm has a high DOL, a small percentage increase in sales can lead to a much larger percentage increase in operating income due to the leverage effect of fixed costs. However, this also means that the firm is more vulnerable to declines in sales volume, as fixed costs remain constant and will need to be covered regardless of revenue.
When discussing the impact of labor costs, particularly in the context of union labor, a high DOL doesn't necessarily mean there are high labor costs, but rather that the company's cost structure is characterized by higher expenses that do not vary with production volume. In cases where firms face demands for higher wages, as indicated by a hypothetical example where wages rise to $24 an hour, management may choose production methods that increase capital intensity to maintain productivity, which changes the proportion of fixed vs. variable costs, potentially increasing the DOL.
Investing in human capital, like any investment, requires upfront costs in anticipation of future benefits. In the context of labor, investing in employee education and skill development can lead to increased productivity. However, the impact of this investment on the DOL would depend on how these costs are classified (fixed or variable) and on the balance between labor and capital investment.