CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
A firm has sales of ₹10,00,000, variable costs of ₹6,00,000 and fixed operating costs of ₹2,00,000. What is its Degree of Operating Leverage (DOL)?
The Degree of Operating Leverage is 2.0. Contribution is ₹4,00,000 (sales less variable costs) and EBIT is ₹2,00,000 after fixed costs, so DOL equals contribution divided by EBIT, which gives 2.0.
- A1.5
- B2.0Correct
- C2.5
- D5.0
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 = 2.0. The value 2.5 results from dividing sales by contribution, which is the wrong base.
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