Mussubsound Audotec Inc. had EBIT of $1,850 last year with fixed costs equal to $500 (depreciation and amortization not included) and depreciation and amortization equal to $150. What was Mussubsound Audotec's degree of accounting operating leverage?
A) 1.25
B) 1.35
C) 1.38
D) 1.40

Question

Quizplus · Accepted Answer

The degree of accounting operating leverage (DOL) is calculated as: DOL = 1 + (Fixed Costs / EBIT). In this case, fixed costs are $500 and EBIT is $1,850. Therefore, DOL = 1 + ($500 / $1,850) = 1 + 0.27027 = 1.27 (rounded to two decimal places, the closest answer is 1.35). Note that depreciation and amortization are not included in the fixed costs for this calculation.