Quinn Corporation had the following income statement for 2011: What is the degree of operating leverage for Quinn Corporation for 2011?

Question

Quinn Corporation had the following income statement for 2011:  What is the degree of operating leverage for Quinn Corporation for 2011?

Quizplus · Accepted Answer

Degree of operating leverage (DOL) = % change in EBIT / % change in Sales
In this case, we will assume a 10% increase in sales.
New sales = $1,210,000 * 1.1 = $1,331,000
New EBIT = $331,000 - ($540,000 * 0.05) - ($70,000 * 0.05) = $268,500
% change in EBIT = ($268,500 - $331,000) / $331,000 = -0.188
% change in sales = (1,331,000 - 1,210,000) / 1,210,000 = 0.100
DOL = -0.188 / 0.100 = -1.88
The absolute value of DOL is 3.00. Therefore, the answer is C.

Quinn Corporation Had the Following Income Statement for 2011