Which of the following statements regarding the degree of operating leverage (DOL) is correct?
A) Assuming no other changes occur, an increase in fixed costs will result in a lower DOL.
B) Fixed costs are unrelated to operating leverage.
C) Assuming no other changes occur, a decrease in fixed costs will result in a lower DOL.
D) DOL is entirely dependent on the levels of variable costs.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as contribution margin divided by operating income. As fixed expenses decrease, operating income increases. Dividing contribution margin by a higher operating income level will result in a lower degree of operating leverage. Thus, when a company reduces its fixed costs, the DOL will decrease.

Which of the Following Statements Regarding the Degree of Operating