Webster and Words manage a product with a 3.5 degree of operating leverage. Sales of the product are expected to decline by 15 percent next year. What is the expected change in the operating cash flow for this product for next year?
A) increase by 23.3 percent
B) increase by 52.5 percent
C) decrease by 4.3 percent
D) decrease by 23.3 percent
E) decrease by 52.5 percent

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) indicates how a percentage change in sales will affect operating cash flow. With a DOL of 3.5, a 15% decline in sales will result in a 3.5 * 15% = 52.5% decrease in operating cash flow.

Webster and Words Manage a Product with a 3