Question

Which of the following statements is true regarding the degree of operating leverage?

A. The degree of operating leverage is irrelevant to managers when trying to understand the effect of potential changes in sales volume and the impact it might have on net operating income.
B. A decline in sales for a company with a high degree of operating leverage will result a larger decline in net operating income (NOI) compared to a company with a low degree of operating leverage.
C. A company with a high degree of operating leverage has a lower proportion of fixed costs in its cost structure compared to a company with a lower degree of operating leverage.
D. A sales increase of 10% for a company with a degree of operating leverage of 4.0 will result in a 40% decrease in net operating income.

Answer 1

B

Step-by-step explanation:

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in the demand

DOL = percentage change in operating income / percentage change in units sold

or

DOL = [Q(P - V) ] /[ Q(P - V) - F]

Q = quantity

P = price

V = variable cost

F = fixed cost

the higher the fixed cost, the higher the DOL