5. Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Aberdeen Petroleum Refiners Corp. had sales of $8,000,000, and it forecasts that next years sales will be $7,440,000. Its fixed costs have been and are expected to continue to be $3,200,000, and its variable cost ratio is 12.50%. Aberdeens capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 9%, and 250,000 shares of common equity. The companys profits are taxed at a marginal rate of 40%.

Given this data, complete the following sentences:

	The percentage change in the companys sales is-8.40% .
	The percentage change in Aberdeens EBIT is .
	The degree of operating leverage (DOL) at $7,440,000 is .

There are several ways to use and interpret a firms DOL value. Consider the following statement and indicate whether it accurately reflects the meaning or an appropriate use of a firms DOL value.

Activities that change the distribution of a firms fixed and variable cost structures, such as outsourcing, will affect a firms DOL.

True or False: This statement accurately describes a firms DOL.

False

True