Donald and Sons manage a product with a 3.0 degree of operating leverage. Sales of the product are expected to increase by 10 percent next year. What is the expected change in the operating cash flow for this product for next year?
A) 3.3 percent increase
B) 10 percent increase
C) 30 percent increase
D) 10 percent decrease
E) 30 percent decrease

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to its sales. A DOL of 3.0 means that for every 1% increase in sales, operating cash flow (or operating income) will increase by 3%. Therefore, a 10% increase in sales is expected to result in a 30% increase in operating cash flow.

Donald and Sons Manage a Product with a 3