US CMA Part 2 · Chapter 5 · Question 10 of 15
Thatcher Optics has a margin of safety ratio of 25%. What is its degree of operating leverage at the current sales level?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 4.0
Explanation
Degree of operating leverage = 1 / margin of safety ratio = 1 / 0.25 = 4.0. This holds because DOL = CM / operating income and operating income = margin of safety in sales x CM ratio. A 10% increase in sales would therefore raise operating income by about 40%.
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