Everything else equal, in which of the following situations will a firm's degree of operating leverage (DOL) increase? Assume the firm currently generates a positive net operating income.
A)Sales increase substantially.
B)The firm issues preferred stock.
C)Fixed costs are decreased.
D)The firm takes advantage of quantity discounts for the first time.
E)The firm's sales move closer to its operating breakeven point.

Question

Everything else equal, in which of the following situations will a firm's degree of operating leverage (DOL) increase? Assume the firm currently generates a positive net operating income. 
A)Sales increase substantially.
B)The firm issues preferred stock.
C)Fixed costs are decreased.
D)The firm takes advantage of quantity discounts for the first time.
E)The firm's sales move closer to its operating breakeven point.

Quizplus · Accepted Answer

The degree of operating leverage (DOL) increases as a firm's sales move closer to its operating breakeven point because the proportion of fixed costs in the total cost structure becomes more significant relative to variable costs, amplifying the effect of sales volume changes on operating income.

Everything Else Equal, in Which of the Following Situations Will