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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    • Avatar of glazed_donutsglazed_donuts
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        • CFA Level 1
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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.

      • Avatar of vaibhavgupta177vaibhavgupta177
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          • CFA Level 2
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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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