The degree of operating leverage is computed as
A) percent change in operating profit divided by percent change in net income.
B) percent change in unit volume divided by percent change in operating profit.
C) percent change in EPS divided by percent change in operating income.
D) percent change in operating income divided by percent change in unit volume.

Question

Quizplus · Accepted Answer

The degree of operating leverage is computed as the percent change in operating income divided by the percent change in unit volume. It measures the sensitivity of operating income to a change in unit volume, which helps in determining the impact of changes in sales volume on the operating income of a company. Choices A and C are incorrect as they involve net income and EPS, respectively, which may not be relevant in computing the degree of operating leverage. Choice B is incorrect as it involves the percent change in unit volume as the numerator, which is not the correct measure of leverage.

The Degree of Operating Leverage Is Computed as