The degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt, then what is its degree of operating leverage?
A) 3.6
B) 4.2
C) 4.7
D) 5.0
E) 5.5

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as the percentage change in EPS divided by the percentage change in sales. Here, EPS increases by 50% (from $1.00 to $1.50) with a 10% increase in sales, so DOL = 50% / 10% = 5.0.

The Degree of Leverage Concept Is Designed to Show How