Degree of operating leverage should be computed only over a profitable range of operations.

Question

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The degree of operating leverage (DOL) measures the responsiveness of the profit of a company to the changes in sales volume. It is calculated by dividing the percentage change in operating income by the percentage change in sales revenue. However, DOL should be computed only over a profitable range of operations because it assumes that all costs are fixed when they are, in fact, a combination of fixed and variable costs. Therefore, if a company operates at a loss, it will have a negative DOL and is not a reliable indicator of its performance.

Degree of Operating Leverage Should Be Computed Only Over a Profitable