If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _____ will cause a change in earnings before interest and taxes (EBIT) that is _____ 1.0 percent.
A) earnings per share; greater than
B) net income; greater than
C) net operating income; less than
D) sales; greater than
E) fixed costs; less than

Question

Quizplus · Accepted Answer

If a firm has a degree of operating leverage greater than 1.0, it means that a 1.0 percent change in sales will cause a change in earnings before interest and taxes (EBIT) that is greater than 1.0 percent. This is because the firm has higher fixed costs compared to variable costs, and an increase in sales leads to a proportionately larger increase in contribution margin, which results in a higher increase in EBIT.

If a Firm Has a Degree of Operating Leverage (DOL)