If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by _____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

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by _____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

Quizplus · Accepted Answer

A firm's DOL measures its sensitivity to changes in sales. If DOL is greater than 1.0, it implies that a 1.0 percent change in sales will lead to a greater than 1.0 percent change in EBIT. This is because a larger portion of the firm's costs are fixed, so a small change in sales can have a larger impact on profitability. Therefore, the best choice is sales.

If a Firm That Has a Degree of Operating Leverage