Degree of operating leverage is:
A) The contribution margin divided by profit
B) The ratio of total variable costs to total revenues
C) The volume of revenue needed to breakeven
D) Only important when the organization is very profitable

Question

Quizplus · Accepted Answer

Degree of operating leverage (DOL) is the percentage change in operating income (EBIT) due to a percentage change in sales. It is calculated by dividing the contribution margin by operating income (EBIT). Therefore, choice A is the correct answer as it represents the calculation of DOL. Choice B is the ratio of total variable costs to total revenues, which is not directly related to DOL. Choice C refers to the breakeven point, which is not the same as DOL. Choice D is not true as DOL is important in determining the sensitivity of operating income to changes in sales regardless of the level of profitability.

Degree of Operating Leverage Is