Calculating operating leverage. Marvelous Corporation has a degree of cash flow operating leverage equal to 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?

Question

Quizplus · Accepted Answer

Degree of accounting operating leverage (DAL) = % change in EBITDA / % change in sales

To find DAL, we need to know the % change in EBITDA for a given % change in sales. We can use the formula:

DAL = DCL / (DCL - FCL)

Where DCL is the degree of cash flow operating leverage and FCL is the degree of financial leverage. Since the problem only gives us the DCL, we can assume that FCL is zero (i.e. no debt).

So, DCL = 1.25 = (% change in EBITDA / EBITDA) / (% change in sales / sales)

Solving for (% change in EBITDA / % change in sales), we get:

(% change in EBITDA / % change in sales) = 1.25 / (1 + ($50 / $1,000)) = 1.136

Therefore, the degree of accounting operating leverage is:

DAL = 1.136 = 1 + (($1,000 - $50) / $1,000) / (1 - 0.75) = 1.32

Therefore, the answer is C.

Calculating Operating Leverage