Understanding Operating Leverage Impact

Easy Measures Of Leverage Operating Leverage

XYZ Corporation is evaluating its operational efficiency and cost structure. The company has fixed costs totaling $500,000 and variable costs that increase proportionately with production levels. During a specific period, the company produces 10,000 units of its product and sells them at a price of $100 per unit.

To measure the impact of operating leverage, XYZ Corporation wants to determine its Degree of Operating Leverage (DOL) at the current level of output. The DOL can be computed by analyzing the percentage change in operating income against the percentage change in sales volume. Which of the following statements best illustrates the impact of operating leverage on XYZ Corporation's financial performance?

A high degree of operating leverage indicates that a small increase in sales can lead to a large increase in operating income.

A low degree of operating leverage implies that fixed costs are insignificant relative to total costs.

The degree of operating leverage is irrelevant when a company has no fixed costs.

Hint

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