CMA Intermediate · Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis
Shreeji Foods Ltd 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 and EBIT is ₹2,00,000, and DOL equals contribution divided by EBIT. Dividing sales by EBIT would wrongly give 5.0.
- A2.0Correct
- B1.5
- 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. Using sales/EBIT (5.0) is wrong because it ignores variable costs.
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