A company with a degree of operating leverage of 4 would expect net income to increase by 200% if sales increased from $100,000 to $150,000.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as the percentage change in net income divided by the percentage change in sales. In this case, DOL=change in net income/change in sales=(net income at $150,000 sales - net income at $100,000 sales)/($150,000 - $100,000). Since the DOL is given as 4, we can set up the equation 4=(net income at $150,000 - net income at $100,000)/($150,000 - $100,000) and solve for the change in net income, which is 200% of the initial net income. Therefore, the answer is true.

A Company with a Degree of Operating Leverage of 4