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CS Executive · Corporate Accounting and Financial Management · Operational Approach to Financial Decision

A firm has a degree of operating leverage (DOL) of 3 at its current sales level. If sales rise by 8% and fixed operating costs stay unchanged, by what percentage will EBIT rise?

EBIT will rise by 24%. The degree of operating leverage measures the percentage change in EBIT for a given percentage change in sales, so multiplying the DOL of 3 by the 8% sales increase gives a 24% rise in operating profit.

  1. A11%
  2. B24%Correct
  3. C2.67%
  4. D8%

Explanation

DOL = % change in EBIT / % change in sales, so % change in EBIT = 3 × 8% = 24%. Adding 3 to 8 gives 11%, which wrongly treats leverage as additive. Dividing 8 by 3 gives 2.67%, which inverts the ratio.

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