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
Participant
• CFA Level 1
0

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
Participant
• CFA Level 2
3

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)