What is operating leverage and how is it calculated? What is its significance?
- What is operating leverage and how is it calculated? What is its significance?
Homework Answers
Operating leverage:-
Operating leverage reflects the impact of change in sales on the level of operating profit of the firm
The significance of DOL may be interpreted as follows.
Other things remaining constant , higher the DOL, higher will be the change in EBIT for same changes in number of units soled in, if firm A has higher DOL than firm B , profit of firm A will increase at faster rate than that of firm B for same increase in demand.
This however works both ways and so losses of firm A will increase at a faster rate than that of firm B for same fall in demand. This means higher the DOL , more is the risk
:- DOL is high where contribution is high.
:- There is a unique DOL for each level of output.
Thus DOL =contribution/EBIT
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estimated percent increase in net operating income of a 5% increase
in sales?
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expenses and total fixed expenses were reversed. In other words,
assume that the total variable expenses are $8,400 and the total
fixed expenses are $21,000. Under this scenario and assuming that
total sales remain the same, what is the degree of operating...
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