RMA Credit Risk Certification Practice Exam

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Using the provided figures, the DOL is calculated as (Sales - Variable costs) / Profit. If Sales 19,442, Variable costs 13,730, and Profit 2,579, what is the DOL?

1.5 3.0 2.21 4.0

Correct Answer:

2.21

Explanation:

The concept here is how responsive operating profit is to changes in sales, measured by the degree of operating leverage (DOL). DOL compares the contribution available to cover fixed costs and profit with the actual profit. It is calculated as Contribution Margin divided by Profit, where Contribution Margin equals Sales minus Variable Costs. Compute the contribution margin: 19,442 minus 13,730 equals 5,712. Then the DOL is 5,712 divided by 2,579, which is about 2.21. This tells you that, all else equal, a 1% change in sales would change operating profit by roughly 2.21%.

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