Which of the following statements is TRUE concerning operating leverage?
A) It summarizes the risk-return tradeoff across alternate revenue possibilities.
B) It measures the change in operating income when costs change proportionately with the change in the number of units sold.
C) The degree of operating leverage increases inversely to the number of units sold.
D) The degree of operating leverage remains constant (in the relevant range) when there is a change in the number of units sold.
E) The degree of operating leverage equals contribution margin divided by operating income, at any specific sales level.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) is calculated as the contribution margin divided by operating income. This ratio helps in understanding how a change in sales volume will affect operating income. It is a measure used to evaluate the sensitivity of operating income to changes in sales volume, highlighting the impact of fixed and variable costs on profitability.

Which of the Following Statements Is TRUE Concerning Operating Leverage