Which of the following is the correct interpretation of a degree of operating le

Question

Which of the following is the correct interpretation of a degree of operating leverage of 5? Multiple Choice Ovelofsalos wm ht to breakaon port rang lowage of 5 mars thit sales can decrease by 5%before the terms ament ?Oper gle erage of 5 mers tat fsalosnoeiseby5%the tm wil ht its break aven port 0?erangleer ofSmarsthat f sales moease by 5%there wil be a 25%roesente frmSpretax profit Operating leverage of 5 measures the degree of debt amployed by the fiemn's dobt structure Operating leverage of 5 means that the company would noed to Increase sales by 5 timos In order to hit its break-even point C Prev 12 of 40 Nexh >

Explanation / Answer

% increase in operating income = % increase in sales x operating leverages

                                              = 5 % x 5

                                              = 0.05 x 5 = 0.25 or 25 %

Hence option “operating leverages 5 means that if sales increased by 5 % there will be a 25 % increase in the firm’s pretax profit” is correct answer.

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