If Q equals the units sold, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the degree of operating leverage is equal to: a. Q / (P-V). b. F / (P-V). c. F/[ (P-V) / P]. d. [ (P-V) Q]/[ (P-V) Q-F].

Question

Business

Arjun Zamora

14 March, 11:37

If Q equals the units sold, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the degree of operating leverage is equal to: a. Q / (P-V). b. F / (P-V). c. F/[ (P-V) / P]. d. [ (P-V) Q]/[ (P-V) Q-F].

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Answers (1)

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Raine · Answer 1

The correct answer is: option D

Explanation:

The degree of operating leverage (DOL) is a measure used to evaluate how a company's operating income changes after a percentage change in its sales. A company's operating leverage involves fixed costs and variable costs. It is a financial ratio that measures the sensitivity of a company's operating income to its sales. This financial metric shows how a change in the company's sales will affect its operating income.

There are two main formulas to calculate the DOL:

DOL = Contribution Margin / Operating Income

or

DOL = [Qx (P-V) ] / [QX (P-V) - F)

Where:

Q: the number of units

P: the price per unit

V: the variable cost per unit

F: the fixed costs