CA Intermediate · Financial Management and Strategic Management · Financing Decisions - Leverages
A firm's sales are ₹20,00,000, variable costs are ₹12,00,000 and fixed operating costs are ₹4,00,000. Interest on debt is ₹1,00,000. What is the Degree of Operating Leverage (DOL)?
The Degree of Operating Leverage is 2.00. Contribution is ₹8,00,000 (sales less variable costs) and EBIT is ₹4,00,000 after fixed operating costs, so DOL equals contribution divided by EBIT, which is 8,00,000 divided by 4,00,000, giving 2.00.
- A1.50
- B2.00Correct
- C2.50
- D5.00
Explanation
Contribution = 20,00,000 − 12,00,000 = ₹8,00,000. EBIT = 8,00,000 − 4,00,000 = ₹4,00,000. DOL = Contribution/EBIT = 8/4 = 2.00. The value 2.50 would result from dividing contribution by EBT (8/3 is not 2.5, but using sales/EBIT gives 5.00), so those options use wrong bases.
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