CFA CFA Level 1 Question about Measures of Leverage – Degree of Operating Leverage

Question about Measures of Leverage – Degree of Operating Leverage

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    • glazed_donuts
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      This material is from LOS 37.b..
      The degree of operating leverage (DOL) is defined as the percentage change in operating income (EBIT) that results from a given percentage change in sales
      DOL = percentage change in EBIT/percentage change in sales
      which can be calculated by:
      DOL = Q(P – V) / Q(P-V) – F
      where Q = quantity of units sold,
      P = price per unit
      V = variable cost per unit
      F = fixed cost

      Can someone please explain why DOL = percentage change in EBIT/percentage change in sales = Q(P – V) / Q(P-V) – F ?? I’m having trouble understanding why they are equivalent.

    • vaibhavgupta177
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      DOL =(% Change in EBIT)/(% Change in Sales)=((change in EBIT)/(Initial EBIT))/((Change in Sales)/(Initial Sales))= (((P-V)*(Q^*-Q))/((P-V)*Q-FC))/((P*(Q^*-Q))/(P*Q))= (Q*(P-V))/((P-V)*Q-FC)

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