Question

If Q equals the units sold, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the degree of operating leverage is equal to: a. Q/(P-V). b. F/(P-V). c. F/[(P-V)/P]. d. [(P-V)Q]/[(P-V)Q-F].

Answer 1

Answer:

The correct answer is: option D

Explanation:

The degree of operating leverage (DOL) is a measure used to evaluate how a company's operating income changes after a percentage change in its sales. A company's operating leverage involves fixed costs and variable costs. It is a financial ratio that measures the sensitivity of a company’s operating income to its sales. This financial metric shows how a change in the company’s sales will affect its operating income.

There are two main formulas to calculate the DOL:

DOL= Contribution Margin/ Operating Income

or

DOL= [Qx(P-V)] / [QX(P-V)-F)

Where:

Q: the number of units

P: the price per unit

V: the variable cost per unit

F: the fixed costs