Asked by Austin isaacs on Jul 16, 2024
Verified
A firm has a DOL = 2.5. If sales decrease by 20%, then OCF will ____________.
A) decrease by 20%
B) increase by 5%
C) increase by 20%
D) decrease by 12.5%
E) decrease by 50%
DOL
Degree of Operating Leverage, a ratio that measures how sensitive a company’s operating income is to a change in its sales, indicating the volatility of earnings.
OCF
Operating Cash Flow, which measures the cash generated by a company's regular business operations.
Sales
The activities involved in selling goods or services to consumers or other businesses.
- Comprehend the significance of the operating leverage ratio and its influence on a company's financial outcomes.
Verified Answer
ES
Elizabeth SumerelJul 17, 2024
Final Answer :
E
Explanation :
The Degree of Operating Leverage (DOL) measures the sensitivity of a firm's operating cash flow (OCF) to changes in its sales. The formula for the impact on OCF given a change in sales is: % Change in OCF = DOL * % Change in Sales. Here, with a DOL of 2.5 and a 20% decrease in sales, the calculation is 2.5 * (-20%) = -50%, indicating that OCF will decrease by 50%.
Learning Objectives
- Comprehend the significance of the operating leverage ratio and its influence on a company's financial outcomes.
Related questions
Financial Leverage Has the Following Effect on Financial Performance ...
Bendel Inc ...
Serfass Corporation's Contribution Format Income Statement for July Appears Below ...
Alpha Corporation Reported the Following Data for Its Most Recent ...
Sales at East Corporation Declined from $100,000 to $80,000, While ...