Computing and interpreting the degree of operating leverage (DOL)

It is December 31. Last year, Western Gas & Electric Company (WGEC) had sales of $12,000,000, and it forecasts that next years sales will be $12,840,000. Its fixed costs have been and are expected to continue to be $900,000, and its variable cost ratio is 40.00%. WGECs capital structure consists of a $13.5 million bank loan, on which it pays an interest rate of 6%, and 300,000 shares of common equity. The companys profits are taxed at a marginal rate of 35%.

Given this data, complete the following sentences:

	The percentage change in the companys sales is .
	The percentage change in EBIT is .
	The degree of operating leverage (DOL) at $12,840,000 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 a firms fixed costs remain constant across a range of sales values. As a result, its DOL will vary across the range of sales values.

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

True

False