Answer (C) is correct . A degree of operating leverage (DOL) of 3.5 means that operating income (EBIT) will increase 3.5 times greater than any sales increase. Multiplying 3.5 times the 6% sales increase results in a pre-tax profit increase of 21%.
Answer (A) is incorrect because The 3.5 is multiplied times the increase in sales.
Answer (B) is incorrect because A firm with operating leverage will experience a rise in pre-tax profits when sales increase.
Answer (D) is incorrect because The DOL is multiplied by the sales change, not divided into it.
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