I did to get better clarification on how need to find the degree of operating leverage and how to calculate this, based on the information that I have - please help. I am not getting this piece..ty
Sure, I can help you with that. The degree of operating leverage (DOL) measures the sensitivity of a company's operating income to changes in its sales. It indicates how much the operating income will change with a given percentage change in sales.
To calculate the degree of operating leverage, you'll need two main pieces of information:
1. Sales revenue: This is the total amount of money generated by the company from sales.
2. Operating income: This is the profit made by the company from its regular business operations, before interest and taxes.
Here's the formula to calculate the degree of operating leverage (DOL):
DOL = % Change in operating income / % Change in sales
To calculate the % change in operating income, you'll need to know the current operating income and the operating income in the previous period (or a hypothetical scenario).
For example, let's say the operating income increased from $100,000 to $150,000. The % change in operating income would be:
% Change in operating income = (New operating income - Old operating income) / Old operating income = (150,000 - 100,000) / 100,000 = 50,000 / 100,000 = 0.5 = 50%
Similarly, to calculate the % change in sales, you'll need the current sales revenue and the sales revenue in the previous period (or a hypothetical scenario).
Once you have these percentages, you can substitute them into the formula to calculate the degree of operating leverage.
Keep in mind that the degree of operating leverage is a measure of sensitivity, so it's important to consider the context and any other relevant factors impacting the company's operations.