Verde Company has a degree of operating leverage of 3.5. This means that a:
A) 1 percent change in operating earnings will result in a 3.5 percent change in net income.
B) 1 percent change in units produced and sold will result in a 3.5 percent change in net income.
C) 1 percent change in units produced and sold will result in a 3.5 percent change in earnings per share.
D) 1 percent change in units produced and sold will result in a 3.5 percent change in operating earnings.

Question

Quizplus · Accepted Answer

The degree of operating leverage measures the sensitivity of a company's operating income to a change in sales volume. A degree of operating leverage of 3.5 means that a 1 percent change in the quantity of units produced and sold will result in a 3.5 percent change in operating earnings.

Verde Company Has a Degree of Operating Leverage of 3