As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will
A) remain unchanged.
B) decrease.
C) change in an undetermined direction.
D) increase.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in sales revenue, assuming all other factors remain constant. As fixed operating costs increase, the denominator in the DOL formula (contribution margin) decreases, therefore increasing the DOL. This means that a small change in sales revenue will result in a larger change in operating income, indicating greater financial risk for the company.

As Fixed Operating Costs Increase and All Other Factors Are