Ralph is in charge of a project that has a degree of operating leverage of 2.5. What will happen to the operating cash ﬂows if Ralph increases the number of units sold by 5 percent?
A) increase by 2 percent
B) increase by 12.5 percent
C) increase by 50 percent
D) decrease by 12.5 percent
E) decrease by 50 percent

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in operating income / % change in sales
DOL = 2.5
% change in sales = +5%
Thus, % change in operating income = 2.5 x 5% = 12.5%
Therefore, operating cash flows will increase by 12.5%. (Option B)

Ralph Is in Charge of a Project That Has a Degree