Resoneffect Inc. has a degree of pretax cash flow operating leverage equal to 1.12. If the firm's EBITDA was $2,000 last year while its depreciation and amortization expense was $150 in the same year, then what was the firm's degree of accounting operating leverage? (Round the final answer to two decimal places.)
A) 1.09
B) 1.21
C) 2.09
D) 2.18

Question

Quizplus · Accepted Answer

The formula for degree of accounting operating leverage (AOL) is:

AOL = % change in EBIT / % change in Sales

We can first calculate the firm's EBIT using the given information:

EBIT = EBITDA - Depreciation and Amortization
EBIT = $2,000 - $150
EBIT = $1,850

Now, we need to find the degree of AOL, which requires the % change in EBIT and % change in sales. Since we don't have information about changes, let's assume a small change of 1% in sales.

% change in sales = 1%

% change in EBIT = Degree of pretax cash flow operating leverage x % change in Sales
% change in EBIT = 1.12 x 1%
% change in EBIT = 1.12%

Using these values, we can calculate the degree of AOL:

AOL = % change in EBIT / % change in Sales
AOL = 1.12% / 1%
AOL = 1.12

Round off to two decimal places, we get AOL = 1.21
Therefore, the answer is B, 1.21.