The "degree of leverage" concept is designed to show how changes in sales will affect EBIT and EPS.If a 10% 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)4.2869
B)4.5125
C)4.7500
D)5.0000
E)5.2500

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) can be calculated as the percentage change in EBIT divided by the percentage change in sales. In this case, we can use the given information to find the DOL as follows:

DOL = (%ΔEBIT) / (%ΔSales) = [(1.50-1.00)/1.00] / [0.10] = 0.50 / 0.10 = 5.0000

Therefore, the answer is D) 5.0000.

The "Degree of Leverage" Concept Is Designed to Show How