Amy is in charge of a project that has a degree of operating leverage of 3.2. What will happen to the operating cash ﬂows if Amy increases the number of units sold by 2 percent?
A) Decrease by 1.6 percent.
B) Decrease by 6.4 percent.
C) Increase by 1.6 percent.
D) Increase by 4.8 percent.
E) Increase by 6.4 percent.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is defined as the percentage change in operating cash flows (OCF) for a given percentage change in sales. Mathematically,

DOL = % change in OCF / % change in sales

Given DOL = 3.2, we can rearrange the equation to find the % change in OCF:

% change in OCF = DOL x % change in sales

Substituting % change in sales = 2%, we get:

% change in OCF = 3.2 x 2% = 6.4%

Since the % change in OCF is positive, we know that increasing the number of units sold by 2% will result in an increase in OCF. Therefore, the correct answer is (E) Increase by 6.4 percent.

Amy Is in Charge of a Project That Has a Degree