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CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages

A firm has sales of ₹10,00,000, variable cost of ₹6,00,000 and fixed operating cost of ₹2,00,000. Its interest expense is ₹50,000. What is the Degree of Operating Leverage (DOL)?

The Degree of Operating Leverage is 2.00. Contribution is ₹4,00,000 (sales less variable cost) and EBIT is ₹2,00,000 after fixed operating cost. DOL equals contribution divided by EBIT, so 4,00,000 divided by 2,00,000 gives 2.00. Interest does not enter operating leverage.

  1. A1.50
  2. B2.00Correct
  3. C2.50
  4. D3.33

Explanation

Contribution = 10,00,000 - 6,00,000 = ₹4,00,000. EBIT = 4,00,000 - 2,00,000 = ₹2,00,000. DOL = Contribution/EBIT = 4,00,000/2,00,000 = 2.00. The value 2.50 would come from wrongly using EBT (1,50,000 gives 2.67) or other mixing; interest is irrelevant to DOL.

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