The formula to calculate the Degree of Operating Leverage (DOL) is:
\[ \text{DOL} = \frac{\text{% Change in EBIT}}{\text{% Change in Sales}} \]
Where:
Degree of Operating Leverage (DOL) is a financial metric used to assess the sensitivity of a company’s operating income to changes in its sales revenue. It quantifies the relationship between a company’s fixed and variable costs.
A higher DOL indicates that a company has a higher proportion of fixed costs compared to variable costs, meaning that a small change in sales revenue will have a significant impact on operating income. Conversely, a lower DOL implies a larger proportion of variable costs, leading to less sensitivity to sales fluctuations.
Let's consider an example:
Using the formula to calculate the Degree of Operating Leverage:
\[ \text{DOL} = \frac{15}{5} = 3 \]
This demonstrates that with a 15% change in EBIT and a 5% change in sales, the Degree of Operating Leverage would be 3, indicating that for every 1% change in sales, EBIT changes by 3%.
