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%.

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