CFA® Level 1: CFA® Level 1 Exam Question

Calculate Degree of Operating Leverage (DOL) and Degree of Financial Leverage (DFL)

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Question

Given the following information on the annual operating results for ArtFrames, a producer of quality metal picture frames, calculate the degree of operating leverage (DOL) and the degree of financial leverage (DFL).

Which of the following choices is closest to the correct answer? ArtFrame DOL and DFL are, respectively: 抯

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A. B. C. D.

C

The calculations are as follows:

1Variable costs = 0.45 * 3,500,000

2Interest Expense = 0.09 * 750,000

Second,calculate DOL:

DOL = (Sales "" Variable Costs) / (Sales "" Variable Costs "" Fixed Costs)

= (3,500,000 "" 1,575,000) / (3,500,000 "" 1,575,000 "" 1,050,000) =2.20

Third,calculate DFL:

DFL = EBIT / (EBIT "" I) = 875,000 / 807,500 =1.08.

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