Calculating Degree of Operating Leverage

We know that the Degree of Operating Leverage is directly related to a firm’s investment in fixed assets, and therefore fixed costs.  A firm that uses more fixed costs, and therefore lower variable costs, will have a higher break-even point than firms with lower fixed costs. However, once the break-even point is reached, firms with higher DOLs make a larger contribution to operating margin. To complete this activity, go to http://finance.yahoo.com/ and find two firms to analyze by typing in their ticker symbols in the “Get Quotes” box. Then select “Income Statement” under the “Financials” section.

Select one firm from an industry that should have a high DOL, and one from a lower DOL industry, and then answer the following questions.

1.  Calculate the DOL for each firm. 

2. Were you surprised by the difference DOLs?