In evaluating degree of operating leverage , it is best that the firm's DOL is ____.
A) higher than 1
B) higher than 2
C) lower than 1
D) equal to 1

Question

Quizplus · Accepted Answer

A DOL lower than 1 indicates that the firm has low fixed costs and high variable costs, meaning that small changes in sales will not have a significant impact on profits. A DOL higher than 1 indicates that the firm has high fixed costs and low variable costs, meaning that small changes in sales will have a significant impact on profits. Therefore, having a DOL lower than 1 is preferable as it means that the firm is less risky and can withstand fluctuations in sales without experiencing significant changes in profits.

In Evaluating Degree of Operating Leverage , It Is Best