Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in sales have on the firm's degree of operating leverage (DOL)?
A)The DOL should increase.
B)The DOL should decrease.
C)The DOL should not change, because the amount of fixed asset does not change.
D)The DOL should increase if fixed operating costs represent a significant proportion of total operating costs; otherwise, the DOL should decrease.
E)Because the fixed operating costs are not know, the impact on DOL cannot be determined.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures how a change in sales affects operating income. When a firm increases its sales using existing fixed assets, it spreads its fixed costs over a larger sales volume, which decreases the DOL because each additional unit sold contributes more to covering variable costs and then to profits, reducing the firm's sensitivity to changes in sales volume.

Suppose a Firm Increases Its Sales Using Existing Fixed Assets