The closer a firm is to its operating breakeven point,the greater is the absolute value of the degree of operating leverage.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in sales revenue. The formula for DOL is as follows: DOL = Contribution Margin / Operating Income. As a company's sales increase, its contribution margin increases, which leads to a larger proportionate increase in operating income. Therefore, the closer a firm is to its operating breakeven point (where its contribution margin equals its fixed costs), the larger its DOL will be. This means that a small change in sales will have a greater impact on the firm's operating income. Therefore, Option A is correct.

The Closer a Firm Is to Its Operating Breakeven Point,the