A ﬁrm has a DOL = 2.5. If sales decrease by 20%, then OCF will ____________.
A) decrease by 20%
B) increase by 5%
C) increase by 20%
D) decrease by 12.5%
E) decrease by 50%

Question

Quizplus · Accepted Answer

The Degree of Operating Leverage (DOL) indicates how a percentage change in sales will affect operating cash flow (OCF). A DOL of 2.5 means that for every 1% change in sales, OCF will change by 2.5%. Therefore, a 20% decrease in sales will result in a 20% x 2.5 = 50% decrease in OCF.

A ﬁRm Has a DOL = 2