The formula for calculating the Degree of Operating Leverage (DOL) is:

A. DOL= \(\frac{ Percentage \ change \ in \ EBIT}{Percentage \ change \ in \ sales}\)

B. DOL = \( \frac{Contribution}{EBIT} \)

C. DOL= \( \frac{EBIT \ + \ Fixed cost}{EBIT} \)

D. DOL.= \( \frac{EBIT}{Contribution} \)

Choose the correct answer from the given options:

The correct answer isA, B and C only. 

Key Points Leverage:

 Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage refers to the use of debt (borrowed funds) to amplify returns from an investment or project. Investors use leverage to multiply their buying power in the market.

Important Points
 Degree of Operating Leverage:

• The degree of operating leverage measures how much a company's operating income changes in response to a change in sales. 
• The DOL ratio assists analysts in determining the impact of any change in sales on company earnings. 
• A company with high operating leverage has a large proportion of fixed costs, meaning a big increase in sales can lead to outsized changes in profits.
• A company with high operating leverage has a large proportion of fixed costs, meaning a big increase in sales can lead to outsized changes in profits.
• The formula for calculating Degree of Operating Leverage is -
• Change in operating income is also known as a contribution. so the formula can also be written as (Contribution / EBIT).

Additional Information