. For sale at 20,000 units, company’s DOL is 5. If the sales increase by 27%, how much EBIT will increase?*2 points120%125%130%135%
Question
. For sale at 20,000 units, company’s DOL is 5. If the sales increase by 27%, how much EBIT will increase?*2 points120%125%130%135%
Solution
The Degree of Operating Leverage (DOL) is a measure of how a percentage change in sales will affect profits. It is calculated as follows:
DOL = % Change in EBIT (Earnings Before Interest and Taxes) / % Change in Sales
In this case, the DOL is given as 5. This means that for every 1% increase in sales, EBIT will increase by 5%.
If sales increase by 27%, we can calculate the increase in EBIT as follows:
% Change in EBIT = DOL * % Change in Sales % Change in EBIT = 5 * 27% % Change in EBIT = 135%
Therefore, if sales increase by 27%, EBIT will increase by 135%. So, the correct answer is 135%.
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