For every 1 percent decrease in sales of a firm, the EBIT decreases by 3.2 percent. What does this statement indicate?
A) The debt/assets ratio of the firm is 3.2 times.
B) The degree of operating leverage of the firm is 3.2 times.
C) The current assets of the firm are 3.2 times its current liabilities.
D) The expenses of the firm are 3.2 percent of its income.
E) The degree of financial leverage of the firm is 3.2 times.

Question

Quizplus · Accepted Answer

The statement describes the degree of operating leverage (DOL), which measures the sensitivity of a firm's EBIT to changes in sales. The fact that a 1 percent decrease in sales leads to a 3.2 percent decrease in EBIT indicates a DOL of 3.2.

For Every 1 Percent Decrease in Sales of a Firm