Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Carter Chemical Co. had sales of $8,000,000, and it forecasts that next years sales will be $7,600,000. Its fixed costs have been and are expected to continue to be $4,400,000, and its variable cost ratio is 12.50%. Carters 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 .
	The percentage change in Carters EBIT is .
	The degree of operating leverage (DOL) at $7,600,000 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.

Assume that at a given sales level, a firms DOL is 2.5. This means that a 1% change in the firms sales will result in a corresponding 2.5% change in the firms EBIT.

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

True

False