A coworker is in charge of a project that has a degree of operating leverage of 2.0. What will happen to the operating cash ﬂows if your coworker decreases the number of units sold by 10
Percent?
A) 10 percent decrease
B) 20 percent decrease
C) 5 percent increase
D) 10 percent increase
E) 20 percent increase

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in operating cash flows / % change in units sold

2 = % change in operating cash flows / -10%

% change in operating cash flows = -20%

Therefore, if the coworker decreases the number of units sold by 10%, the operating cash flows will decrease by 20%. This corresponds to answer choice B.

A Coworker Is in Charge of a Project That Has