A degree of operating leverage (DOL) equal to 1.5 times indicates that for every 1 percent change in _____.
A)earnings per share (EPS) there will be a 1.5 percent change in sales
B)interest there will be a 1.5 percent change in earnings before interest and taxes (EBIT)
C)sales there will be a 1.5 percent change in earnings before interest and taxes (EBIT)
D)earnings before interest and taxes (EBIT) there will be a 1.5 percent change in earnings per share (EPS)
E)sales there will be a 1.5 percent change in earnings per share (EPS)

Question

A degree of operating leverage (DOL) equal to 1.5 times indicates that for every 1 percent change in _____. 
A)earnings per share (EPS) there will be a 1.5 percent change in sales
B)interest there will be a 1.5 percent change in earnings before interest and taxes (EBIT)
C)sales there will be a 1.5 percent change in earnings before interest and taxes (EBIT)
D)earnings before interest and taxes (EBIT) there will be a 1.5 percent change in earnings per share (EPS)
E)sales there will be a 1.5 percent change in earnings per share (EPS)

Quizplus · Accepted Answer

A degree of operating leverage (DOL) indicates the percentage change in earnings before interest and taxes (EBIT) for a 1 percent change in sales. Therefore, a DOL of 1.5 times means that for every 1 percent change in sales, there will be a 1.5 percent change in EBIT. Choice A and E are incorrect because they refer to a percentage change in earnings per share (EPS), which is not directly related to the DOL. Choice B is incorrect because it refers to a percentage change in interest, which is also not directly related to the DOL. Choice D is incorrect because it suggests a change in EPS for a change in EBIT, which is not the definition of the DOL.

A Degree of Operating Leverage (DOL) Equal to 1