Skip to content

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

Sunrise Traders 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?

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 is 2.0.

  1. A1.5
  2. B2.0Correct
  3. C5.0
  4. D2.5

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 gives 5.0, which is wrong because it ignores variable costs.

Did you get it right without looking?

One question tells you little. A timed set on Operational Approach to Financial Decision shows your real accuracy, how long you take and where you lose marks.

Practise Operational Approach to Financial DecisionFree diagnostic mock

More Operational Approach to Financial Decision questions