2 as well as relevant data for a 500 unit sales level

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Unformatted text preview: data for a 500-unit sales level. We can illustrate two cases using the 1,000-unit sales level as a reference point. Case 1 A 50% increase in sales (from 1,000 to 1,500 units) results in a 100% increase in earnings before interest and taxes (from $2,500 to $5,000). Case 2 A 50% decrease in sales (from 1,000 to 500 units) results in a 100% decrease in earnings before interest and taxes (from $2,500 to $0). From the preceding example, we see that operating leverage works in both directions. When a firm has fixed operating costs, operating leverage is present. An increase in sales results in a more-than-proportional increase in EBIT; a decrease in sales results in a more-than-proportional decrease in EBIT. degree of operating leverage (DOL) The numerical measure of the firm’s operating leverage. Measuring the Degree of Operating Leverage (DOL) The degree of operating leverage (DOL) is the numerical measure of the firm’s operating leverage. It can be derived using the following equation:4 DOL Percentage change in EBIT Percentage change in sales (12.4) 4. The degree of ope...
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