Oeta Works has a degree of pretax cash flow operating leverage of 1.25. If the firm's EBITDA was $1,000 last year while its depreciation and amortization expense was $50 in the same year, then what was the firm's degree of accounting operating leverage?
A) 1.26
B) 1.30
C) 1.32
D) 1.35

Question

Quizplus · Accepted Answer

Degree of accounting operating leverage (AOL) = % change in EBIT / % change in Sales

% change in EBIT = % change in EBITDA - % change in Depreciation and amortization expense

% change in EBITDA = % change in Sales * degree of pretax cash flow operating leverage = % change in Sales * 1.25

% change in Depreciation and amortization expense = 0 (assuming it does not change with sales)

Therefore, % change in EBIT = % change in Sales * 1.25 - 0 = % change in Sales * 1.25

So, AOL = % change in EBIT / % change in Sales = 1.25

Hence, the answer is C) 1.32

Oeta Works Has a Degree of Pretax Cash Flow Operating