Final answer:
The calculation of the degree of operating leverage (DOL) is not done by dividing sales by the contribution margin. Instead, the DOL is calculated by dividing the percentage change in EBIT by the percentage change in sales or by dividing the total contribution margin by EBIT.
Step-by-step explanation:
The statement 'The degree of operation leverage is computed by dividing sales by the contribution margin' is false. The correct formula for calculating the degree of operating leverage (DOL) at a certain level of sales is:
DOL = Percentage Change in EBIT (Earnings Before Interest and Taxes) / Percentage Change in Sales.
Alternatively, at a given level of sales, it is also calculated by:
DOL = Total Contribution Margin / EBIT.
The contribution margin is the sales revenue minus variable costs, and it is used to cover fixed costs and contribute to profits. The degree of operating leverage reflects how sensitive the operating income is to a change in sales and is used in assessing the break-even point and the riskiness of operational structure.