The corporate finance division of Intelligent Semiconductor is examining the firm's recent sales in an attempt to forecast future operating performance. In their investigation, the management of the firm's corporate finance division have identified the following sales and EBIT information for the previous two years:
Sales in year 1 $1,200,000 -
Sales in year 2 $1,500,000 -
EBIT in year 1 $400,000 -
EBIT in year 2 $550,000 -
Given this information, what is the degree of operating leverage for Intelligent Semiconductor for this period?
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A. B. C. D. E.E
To calculate the degree of operating leverage (DOL), use the following equation: {% change in EBIT/% change in sales}. Incorporating the given information into this equation yields the following: {[(year 2 EBIT $550,000 - year 1 EBIT $400,000)/year 1 EBIT $400,000]/[(year 2 sales $1,500,000- year 1 sales $1,200,000)/ year 1 sales $1,200,000] = 1.50