Which of the following statements regarding fixed costs and degree of operating leverage (DOL) is correct?
A) A decrease in fixed costs of 50% will cause the DOL to increase by 50%.
B) An increase in fixed costs of 30% will cause the DOL to decrease by 60%.
C) An increase in fixed costs typically represents an investment in infrastructure by a company and results in a higher DOL.
D) An increase in fixed costs typically represents an investment in infrastructure by a company and results in a lower DOL.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. As fixed expenses increase, operating income falls. When operating income falls, contribution margin is divided by a lower operating income figure, and the result is a higher DOL. Thus, when a company makes an investment in infrastructure and its fixed costs increase, the DOL will increase.

Which of the Following Statements Regarding Fixed Costs and Degree