4 3 the degree of operating leverage also depends on

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: evel of sales used as a point of reference. The closer the base sales level used is to the operating breakeven point, the greater the operating leverage. Comparison of the degree of operating leverage of two firms is valid only when the same base level of sales is used for both firms. 428 PART 4 Long-Term Financial Decisions Whenever the percentage change in EBIT resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists. This means that as long as DOL is greater than 1, there is operating leverage. EXAMPLE Applying Equation 11.4 to cases 1 and 2 in Table 11.4 yields the following results:4 Case 1: 100% 50% 2.0 Case 2: 100% 50% 2.0 Because the result is greater than 1, operating leverage exists. For a given base level of sales, the higher the value resulting from applying Equation 11.4, the greater the degree of operating leverage. A more direct formula for calculating the degree of operating leverage at a base sales level, Q, is shown in Equation 11.5. DOL at base sales level Q EXAMPLE Substituting Q 1,000, P $10, VC yields t...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online