Question

he degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent 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?

Answer 1

Answer: 5

Explanation:

The measure used to evaluate a change in company 's operating income as a result of relative change in sales is called degree of operating leverage of the company. The operating leverage has two components that is fixed cost and variable cost.

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Operating income of a company is denoted as EBIT, that is, earnings before interest and tax.

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FORMULA = $\frac{percentage\ change\ in\ EBIT}{percentage\ change\ in\ sales}$

                = $\frac{50}{10}$ = 5

note :-

percentage change in EBIT = $\frac{1.5-1}{1}$= 50%