The degree of operating leverage is equal to:
A) 1 + OCF/(FC + VC).
B) 1 + OCF/FC.
C) 1 + FC/OCF.
D) 1 + VC/OCF.
E) 1 − (FC + VC)/OCF.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of an organization's operating income (earnings before interest and taxes) to changes in sales. It is calculated as the percentage change in operating income divided by the percentage change in sales.

DOL = % Change in Operating Income / % Change in Sales

Using the formula for operating income, OCF = (P-V)Q-F, where P is the price per unit, V is variable cost per unit, Q is quantity sold, and F is fixed cost, we can rearrange the formula to express the DOL as a function of fixed costs and operating cash flows:

DOL = (P-V)Q / (P-V)Q - F
    = Q / Q - F / (P-V)

Simplifying further:

DOL = 1 / (1 - F / (P-V)Q)
    = 1 + F / OCF

Therefore, the correct answer is C) 1 + FC/OCF

The Degree of Operating Leverage Is Equal To