Suppose that a project has a DOL = 0.75. If the quantity being produced increases from 96 to 100, what is the expected percentage change in operating cash flow?
A) -2.5%
B) 3.1%
C) 4.2%
D) 5.5%
E) 6.2%

Question

Quizplus · Accepted Answer

The Degree of Operating Leverage (DOL) is used to estimate the percentage change in operating cash flow for a given percentage change in quantity produced. The formula is: % change in operating cash flow = DOL * % change in quantity. The percentage change in quantity is (100-96)/96 = 4.17%. Therefore, the expected percentage change in operating cash flow is 0.75 * 4.17% = 3.13%, which is closest to 3.1%.

Suppose That a Project Has a DOL = 0