The "degree of leverage" concept is designed to show how changes in sales will affect EBIT and EPS. If a 10% increase in sales causes EPS to increase from $1.00 to $1.50, and if the firm uses no debt, then what is its degree of operating leverage?
A) 5.0000
B) 5.2500
C) 4.7500
D) 4.5125
E) 4.2869

Question

Quizplus · Accepted Answer

The degree of operating leverage is calculated as the percentage change in EBIT divided by the percentage change in sales. In this case, the percentage change in sales is 10%, and the percentage change in EBIT is 50% (from $1.00 to $1.50). Therefore, the degree of operating leverage is 50% / 10% = 5.0000.

The "Degree of Leverage" Concept Is Designed to Show How