New Free Workshop on RBI Grade B Descriptive Answer Writing - Join Us!
Register

Question

If the degree of operating leverage of a firm is given as 2.8 times, it means:

A If there is 2.8% increase in sales, the EBIT will increase by 1% Correct Answer Incorrect Answer
B If there is 2.8% increase in sales, EPS will increase by 1% Correct Answer Incorrect Answer
C If there is 1% increase in sales, the EBIT will increase by 2.8% Correct Answer Incorrect Answer
D If there is 1% increase in sales, EPS will increase by 2.8% Correct Answer Incorrect Answer
E If there is 1% increase in EBIT, EPS will increase by 2.8% Correct Answer Incorrect Answer

Solution

Operating leverage gives the relationship between Sales and EBIT Operating Leverage = (%change in EBIT)/(%Change in Sales’) it follows that, % change in EBIT = DOL* % Change in Sales As such, if there is 1% change in sales and DOL is 2.8, it means that % change in EBIT will be 2.8%.

Practice Next

Relevant for Exams:

×
×