Wize University Managerial Accounting Textbook > Cost-Volume-Profit Analysis
Degree of Operating Leverage
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Degree of Operating Leverage
The Degree of Operating Leverage (DOL) is a measure used to evaluate how a company’s profit changes when sales volume changes.
- High DOL indicates that the company relies more on fixed costs and profit is more sensitive to changes in sales volume.
- Low DOL indicates that the company relies more on variable costs and profit is less sensitive to changes in sales volume.
- The DOL is a multiplier that can be used to determine the change in profit based on a change in sales.
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Example: Degree of Operating Leverage
Hall Industries manufactures and sells a printer for office environments. Information on this product is as follows:
- Determine the degree of operating leverage.
- If sales are expected to increase by 10%, what will be the new net income?
- If sales are expected to decrease by 5,000 units, how will net income be affected?
Mark Yourself Question
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Practice: Degree of Operating Leverage
The following income statements are available for Old School Company and New Age Company:
- Calculate the degree of operating leverage for each company.
- Assume that sales revenue decreases by $90,000 for both companies, what will be the new net income for each company?