The "degree of leverage" concept is designed to show how changes in sales will affect EBIT and EPS.If a 30.00% 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? Do not round intermediate calculations.
A) 1.2500
B) 1.5667
C) 2.0333
D) 1.6667
E) 1.3000

Question

Quizplus · Accepted Answer

The degree of operating leverage (DOL) can be calculated using the formula: DOL = % Change in EPS / % Change in Sales. Given a 30.00% increase in sales causes EPS to increase from $1.00 to $1.50, the % Change in EPS is 50% (from $1.00 to $1.50 is a $0.50 increase on $1.00, which is 50%). Plugging these values into the formula gives DOL = 50% / 30% = 1.6667.

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