What measure evaluates the sensitivity of Operating Income (EBIT) to changes in sales revenue volume?
ADegree of Financial Leverage (DFL)
BDegree of Operating Leverage (DOL)
CDegree of Combined Leverage (DCL)
DTotal Leverage Index
Explanation
• Degree of Operating Leverage (DOL) measures how sensitive a company’s operating income is to percentage changes in revenue sales volume.
• Formula: $text{DOL} = frac{text{Percentage Change in EBIT}}{text{Percentage Change in Sales}}$ or $frac{text{Contribution Margin}}{text{EBIT}}$.
• Companies with high fixed operating costs exhibit higher operating leverage and higher business risk.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Leverage Analysis
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