If a company experiences a change in operating income levels due to a change in period expenses, which of the following statements regarding the degree of operating leverage (DOL) is correct?
A) An increase in operating income due to decreased fixed period expenses will result in an increase in the degree of operating leverage.
B) An increase in operating income due to a decrease in fixed period expenses will result in no change to the degree of operating leverage.
C) A decrease in operating income due to an increase in fixed period expenses will result in an increase in the degree of operating leverage.
D) A decrease in operating income due to an increase in fixed period expenses will result in a lower degree of operating leverage.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. When operating income drops due to an increase in fixed period expenses, the denominator of the equation drops, and the result is a larger number for DOL. Therefore, when operating income drops, DOL increases.

If a Company Experiences a Change in Operating Income Levels