Comparison of the degree of operating leverage of two firms is valid only when the base level of sales used for each firm is the same.

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) measures the change in operating income resulting from a change in sales volume. It is calculated as the percentage change in operating income divided by the percentage change in sales. However, since the DOL is affected by the level of sales at which it is computed, comparison of the DOL between two firms requires that the base level of sales used for each firm is the same. Therefore, the statement is true.

Comparison of the Degree of Operating Leverage of Two Firms