Corporate Finance Q100

0. While analyzing the impact of the economy’s growth on the revenues generated by Com Point, Mr. Shah recorded earnings of Rs.200 billion and expected them to grow by 10% due to the increasing demand. To evaluate the impact of this, he wants to calculate the operating leverage with the following data:
Sales in 2009 22.5 million computers
Average price per computer Rs.90,000
Fixed costs for the period Rs.33 billion
Variable costs per computer Rs.70,000

What is the degree of operating leverage (DOL)

Answer
Comment
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Option : B
Explanation : DOL = [Q (P - V)] / [Q (P - V) - F]
=[22.5 million (Rs.90,000 – Rs.70,000)] / [22.5 million (Rs.90,000 – Rs.70,000) – 33 billion] = 1.08
For a 10 percent increase in computers sold, operating income increases by 1.08 * 10% = 10.08%.

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