Which of the following statements is true with respect to the degree of operating leverage (DOL)? Multiple Choice It is calculated as the ratio of contribution margin (CM) to operating income, at each level of output. It can be calculated and used by manufacturing but not service firms. For most firms, it is relatively constant in amount as sales volume changes. It is calculated as the amount of operating income × (1 − t), where t = the income tax rate. It provides a simple way to estimate the change in total fixed cost for a given change in sales volume.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Which of the following statements is true with respect to the degree of operating leverage (DOL)?
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It is calculated as the ratio of contribution margin (CM) to operating income, at each level of output.
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It can be calculated and used by manufacturing but not service firms.
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For most firms, it is relatively constant in amount as sales volume changes.
-
It is calculated as the amount of operating income × (1 − t), where t = the income tax rate.
-
It provides a simple way to estimate the change in total fixed cost for a given change in sales volume.
-
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