You are in charge of a project that has a degree of operating leverage of 1.06. What will happen to the operating cash flows if the number of units you sell increase by 3.7 percent?
A) 3.49 percent decrease
B) 4.76 percent decrease
C) 3.70 percent decrease
D) 3.69 percent increase
E) 3.92 percent increase

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) indicates the percentage change in operating cash flows for a given percentage change in sales. With a DOL of 1.06, a 3.7% increase in sales will result in a 3.92% increase in operating cash flows (1.06 * 3.7% = 3.922%).

You Are in Charge of a Project That Has a Degree