Which one of the following offers the most plausible scenario for a firm that maintained a constant degree of operating leverage when its level of fixed costs doubled?
A) Depreciation expense increased.
B) The variable cost percentage decreased.
C) Sales revenues declined.
D)Pretax profits decreased.

Question

Quizplus · Accepted Answer

A constant degree of operating leverage (DOL) when fixed costs double implies that the firm's sensitivity to changes in sales volume in terms of its operating income remains unchanged. This can be achieved if the variable cost percentage decreases, meaning a larger portion of each sales dollar contributes to covering the increased fixed costs, thus maintaining the DOL.

Which One of the Following Offers the Most Plausible Scenario